How we think about DeFi regulation

Plus: Updates on the SEC's ATS Rulemaking and a Tornado Cash Lawsuit update

Jun 07, 2023

Congress is currently considering legislation regulating the market structure for digital assets. Just yesterday, the House Agriculture Committee held a hearing on the topic. This Committee has been working closely with the House Financial Services Committee who is also hosting a hearing next week.

Both Committees have been gracious enough to constructively consider our input and we look forward to working with them during this process. The proposed legislation creates a federal pathway for fundraising around the issuance of a token, as well as registration for centralized cryptocurrency exchanges. This legislation further delineates the roles for the SEC and CFTC when it comes to regulating these activities.

One hotly discussed topic surrounding this legislation is whether it should address "DeFi." Many people have different understandings of what this term means, and indeed we have already seen centralized actors purporting to be decentralized finance go bankrupt and defraud customers whose assets they were in custody of.

This week we published a further explanation of what it means to conduct decentralized exchange, and articulated our top priority to ensure that any legislation regulating cryptocurrency markets respect the free speech rights of developers to publish code.

In the coming weeks we will be guarding against inclusion of any provision that would create a government registration or licensure requirement before exercising this fundamental right.

Speaking of regulating DeFi, today Coin Center filed a second comment letter with the Securities and Exchange Commission in its ongoing rulemaking regarding the definition of ‘exchange’ and Alternative Trading Systems.

Our first comment letter, in April of Last year, explained that the proposed redefinition of “exchange” violates the First Amendment by requiring a license to speak–even of open source developers. Our new comment is in response to the Commission having reopened the comment period after it made available “supplemental information” to address the fact that its initial 200-page proposal never once mentioned crypto or DeFi or anything like it even though they were clearly implicated by the change.

In the new comment we explain that the proposed rule would not withstand constitutional scrutiny because it is insufficiently clear in its potential applicability as to render it unconstitutional under the Due Process Clause of the Fifth Amendment. Comments from the public are due on Tuesday and we encourage all interested folks to file.

Last week we filed our motion for summary judgment in the case we and co-plaintiffs have brought against OFAC and the Treasury Department for its illegal sanctioning of Tornado Cash smart contracts.

What this tells the court is that since there are no facts in dispute between the parties at trial, it can go ahead and make a judgment based on the law, and we lay out our arguments for why the government clearly violated the law in this case.

We’re extremely proud of our memo in support of the motion, which we think clearly shows that contrary to what the government may claim, the Tornado Cash smart contract addresses in question are immutable executable code (i.e. not persons), and thus not subject to OFAC’s authority.

We encourage you to read it. It’s written in plain English, so you can understand it even if you’re not a lawyer. We hope it gives you a sense of the work our litigation team (including Cam, Jeff, Abe, Peter, and Michael) has been doing to defend our rights to publish and use crypto code.