EFF Criticizes SEC For Violating Freedom Of Speech During Etherdelta Action

EFF Criticizes SEC For Violating Freedom Of Speech During Etherdelta Action

The Electronic Frontier Foundation (EFF) issued a statement criticizing the Securities and Exchange Commission (SEC) for violating freedom of speech laws during the commission’s actions against Etherdelta last year.

The statement, released earlier today, claims that code can be considered speech, and that code is, therefore, subject to freedom of speech laws. The SEC allegedly violated this freedom of speech laws when initiating enforcement proceedings against Etherdelta and its creator last year.

“The Electronic Frontier Foundation (EFF) is concerned that certain language in a certain 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,” explains the EFF in its statement.

“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.”

The EFF wants to ensure that code remains seen as a type of speech, and therefore falls under existing freedom of speech laws. The EFF feels that the SEC’s actions against Etherdelta and its creator violated those laws.

Last year, the SEC initiated enforcement proceedings against Zachary Coburn, creator of Etherdelta.

Coburn, according to the SEC, “wrote and deployed the Etherdelta smart contract to the Ethereum blockchain and that he “should have known that [these actions] would contribute to Etherdelta’s violations and thus, under Exchange Act Section 21C(a), caused Etherdelta to violate Section 5 of the Exchange Act.”

In other words, the SEC initiated enforcement actions against Coburn because he wrote a smart contract – a piece of computer code or software based on the blockchain – that was later used to violate the law.

The EFF and other organizations have been critical of the SEC for attempting to implement policy through enforcement. The action by the SEC last year could be another example of this attempt.

The SEC Used Overly Broad Language That Could Target All Crypto Programmers

The argument comes down to the responsibility of an algorithm maker. Does the person who makes an algorithm have a responsibility to ensure that the algorithm is used responsibly? Can that person publish and write code without obtaining a license?

Here’s how the SEC ruled, during its initial statements on the matter:

“A system uses established non-discretionary methods if it provides a trading facility or sets rules. For example, an entity that provides an algorithm, run on a computer program or on a smart contract using blockchain technology, as a means to bring together or execute orders could be providing a trading facility. As another example, an entity that sets execution priorities standardizes material terms for digital asset securities traded on the system, or requires orders to conform with predetermined protocols of a smart contract, could be setting rules. Additionally, if one entity arranges for other entities, either directly or indirectly, to provide the various functions of a trading system that together meet the definition of an exchange, the entity arranging the collective efforts could be considered to have established an exchange.”

The EFF took issue with the language of the SEC’s statement. They had a particular problem with the SEC’s use of broad language that could be applied to a range of different cases, including the line, “an entity that provides an algorithm.” This line could be used to refer to anyone publishing code and working to develop systems that could benefit the public, including computer programmers and cryptographic researchers.

Furthermore, the SEC’s use of lines like “an entity that provides an algorithm” could be a violation of First Amendment free speech laws. It could be used to target anyone who writes code:

“Because publishing code is protected by the First Amendment, such an outcome would be unconstitutional, and would undermine important policy goals such as ensuring that innovation in blockchain and distributed ledger technology can continue to flourish.”

The EFF is a non-profit civil liberties organization founded in 1990 with the goal of promoting privacy, free expression, and innovation. 20 years ago, the EFF was involved in a landmark case that established the act of writing and publishing code as fully protected under the First Amendment.

Moving forward, the EFF may provide legal representation and assistance to decentralized app developers and other coders involved in areas where legal principles are non-existent or in development. Situations like the Etherdelta case are confusing and without precedent, which is why organizations like the EFF feel motivated to protect crypto-liberty.


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