FFF Public Letter – Writing And Publishing Code Cannot Violate Securities Laws But Is Freedom Of Speech

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A recent public statement from the U.S. Securities and Exchange Commission (SEC) implied that writing and publishing code might constitute a violation of securities laws. In its statement about the cease and desist order against the co-founder of decentralized cryptocurrency exchange EtherDelta, the agency explained that someone who “provides an algorithm” might be found to be running a securities exchange.  In the order itself, the SEC stated that EtherDelta’s creator had violated securities laws because he “wrote and deployed” code that he “should have known” would contribute to EtherDelta’s alleged violations.

FFF Challenges SEC

The Electronic Frontier Foundation (EFF) challenges this view and published a public letter reminding the agency that writing and publishing code is a form of protected speech under the First Amendment and that the courts don’t take kindly to government agencies requiring people to obtain licenses before exercising their free speech rights. 

The Electronic Frontier Foundation (EFF) is concerned that certain language in a recent public statement and in 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. The statement raises significant concerns for EFF because imposing liability for, or prior restraints on, publishing and distributing code would violate the First Amendment and chill innovation.

FFF letter to SEC

EtherDelta was founded by Zachary Coburn. The SEC charged Coburn with running an unregistered national securities exchange. He settled and agreed to pay over $300,000. While EFF takes no position on whether other aspects of EtherDelta violated the law or SEC regulations, the organization urged the SEC to clarify its dangerously broad language regarding potential liability for merely writing and publishing code.

Courts have long recognized that computer code is speech protected by the First Amendment. Universal City Studios, Inc. v. Corley,273 F.3d 429,445-46 (2d Cir. 2001); Junger v. Daley,209 F.3d 481,485 (6th Cir. 2000); Bernstein v. Dep’t of Justice,176 F.3d 1132,1140-41 (9th Cir. 1999), reh’g granted, opinion withdrawn, 192 F.3d 1308 (9th Cir. 1999); Karnv. Dep’t of State,925 F. Supp. 1,9-10 (D.D.C. 1996).

FFF letter to SEC

According to FFF, there are many reasons why software that enables decentralized currency or other exchanges may be useful to consumers. That’s why it’s important that regulatory interventions today don’t stifle that innovation by claiming they can impose liability merely for the act of writing or distributing code. 

First Amendment Also Protects Financial Transactions

The FFF takes the position that in addition to the fact that the code behind decentralized exchanges is itself speech, decentralized exchanges also foster freedom of association by allowing for pseudonymous transactions that are resistant to censorship. Protection of such financial transactions is critical to ensuring public access to speech, as the ability to collect funds often plays a near-existential role in expression, online and offline.

SEC Position On Decentralization

Speaking at an event at the University of Missouri School of Law, on February 8, 2019, SEC commissioner, Hester Peirceremarked that the SEC needs to welcome innovation to improve the financial market function and facilitate access to financial markets to all segments of the population.

Peirce pointed out that for the SEC, decentralization is particularly challenging because “Blockchain-based networks offer a new way of coordinating human action that does not fit as neatly within our securities framework.” However, she also notes,

Decentralization is nothing new; it is at the root of our economic system; free markets draw on the talents and knowledge of people all across society to produce what society needs.

Programmers Are Not Responsible

There were many facts in the specific case of EtherDelta that may have attracted the SEC’s attention, but the act of publishing code used in a decentralized exchange should not be one of them. The FFF stated in the letter to the SEC that it is crucial that those engaged in developing protocols, verifying transactions through mining, and writing code are not held liable for operating, or assisting with operating, a securities exchange. Imposing regulatory or criminal liability for such activity would run afoul of the First Amendment. 

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