On January 26, 2022, the SEC released a rulemaking proposal that, among other things, would expand the definition of "exchange" under Rule 3b-16 of the Exchange Act. We write out of concern that some language in the proposed rule may inadvertently designate decentralized systems, such as some of those built on Ethereum, as exchanges within the meaning of the Exchange Act of 1934 (the “’34 Act”) if those systems are used to transact in cryptocurrencies that are misconstrued as securities. We do not believe it likely that the Commission intends the proposal to be so broad. After all, as we explain in our letter, the decentralized systems that run on blockchain are in many respects the opposite of the centralized exchanges that Congress set out to regulate in the ’34 Act. Moreover, the proposal does not mention cryptocurrency, blockchain, or decentralized finance, let alone explain how the rigorous requirements of the ’34 Act could sensibly be applied in the blockchain context. We certainly would never expect or be inclined to believe the Commission would take the extraordinary step of covering blockchain-based systems without meaningful notice or consultation. Nevertheless, for the sake of providing regulatory clarity for the burgeoning blockchain sector, we urge the Commission to declare expressly that blockchain-based networks do not fall within the scope of the amendments at issue here.
In the unlikely event that the Commission intends to designate blockchain-based networks as exchanges, we must point out that a regulation finalizing the proposal as written would violate the ’34 Act, the Administrative Procedure Act (the “APA”), and the U.S. Constitution. The text and purpose of the ’34 Act leave no doubt that Congress intended to treat as exchanges only those places and facilities that match up orders, not those that help potential buyers search for potential sellers, let alone those that might possibly serve that purpose, at least in part, without ever intending to. The Commission offers a different interpretation of the statutory definition of exchange based on its desire to cover certain communication protocol systems (“CPSs”) as broker-dealers, but that desire is simply irrelevant to the meaning Congress gave the word exchange. The proposal would jettison Congress’s clear regulatory framework for a poorly-demarcated regime that inflicts meaningful uncertainty costs on software developers and millions of others in the technology sector who build or maintain systems through which the public interacts—all for the sake of speculative benefits that the proposal fails to compare to its admitted costs. And on top of all this, the proposal—without conspicuous self-reflection—regulates speech on the basis of its content in violation of the First Amendment.