Has the SEC Violated the First Amendment?
On February 10th, 2019, the U.S. Securities and Exchange Commissions (SEC) announced via twitter their new guidelines for Initial Coin Offerings (ICO), a type of funding utilizing cryptocurrencies. On their website, the SEC states that ICO's "bring increased risk of fraud and manipulation because the markets for these assets are less regulated than traditional capital markets" and in 2018, the SEC charged 19 cryptocurrency projects with fraud. In their 2019 guidelines the SEC states that, "While some ICOs may be attempts at honest investment opportunities, many may be frauds, separating you from your hard-earned money with promises of guaranteed returns and future fortunes...with little recourse for victims after-the-fact."
At first glance, this may seem like an honest attempt to warn citizens and cryptocurrency users alike about some of the dangers of ICOs. However, where the SEC gets into contested territory is their litigation against the decentralized cryptocurrency exchange, EtherDelta, and the SEC's correlating 2019 guidelines.
In their 2019 guidelines, the SEC states that most centralized ICOs need to be registered with the SEC as an exchange or security offerings and in a SEC press release issued on November 8, 2018, the SEC charged Ether Delta with operating an unregistered exchange. The fact that the SEC wrote in their statement regarding the charge that, "web-based systems that accept and display orders and servers that store orders…[could] provide the means for investors and market participants to find counterparties, discover prices, and trade a variety of digital asset securities", could be a violation of our First Amendment rights and imply that simply creating a webpage where you can buy and sell could be seen as a security offering or security exchange.
The non-profit civil rights group Electronic Frontier Foundation issued a 9-page letter to the SEC detailing the ways they could be violating the First Amendment. On the first page of the letter, Electronic Frontier Foundation states, "the SEC's order involving the EtherDelta smart contract could be read to imply that persons engaged in merely writing and publishing computer code could run afoul of U.S. securities laws." This would directly violate our first amendment rights and put the SEC in danger of violating the Constitution. Seemingly, anyone who writes an algorithm or writes code, including for the public good, could be required to obtain a license and register with the SEC.
While the SEC's guidelines for ICOs may be a useful potential tool, the SEC also needs to be careful with the wording of their statements and guidelines, and ensure that supplying code or algorithms would not be seen as a project that needs registration or a license.