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US SEC’s Proposal On ‘Exchange’ Definition Could Be Unconstitutional – Think Tank

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Source: AdobeStock/Todd Taulman


A recent proposal by the US Securities and Exchange Commission (SEC) aims to amend the definition of ‘exchange’ and alternative trading systems (ATSs) in American regulation, but it could instead create  “an inappropriately broad standard for registration” that would place unconstitutional restraints on the protected speech of software developers and technologists, according to Washington DC-based crypto think tank Coin Center.

The SEC said it is proposing to amend Rule 3b-16 under the Securities Exchange Act of 1934 with respect to the statutory definition of ‘exchange’ to include systems that offer the use of non-firm trading interest and communication protocols to bring together securities’ buyers and sellers. 

The agency proposes to alter this definition from a person who “brings together orders” and “uses established, non-discretionary methods” to carry out a trade, to a person who “brings together buyers and sellers” and “makes available” a range of methods for such persons to engage in trade, including “communication protocols.”

“In addition, the Commission is re-proposing amendments to its regulations under the Exchange Act that were initially proposed in September 2020 for ATSs to take into consideration systems that may fall within the definition of exchange because of the proposed amendments and operate as an ATS,” according to the agency.

In its comments on the SEC’s proposal, Coin Center points to the potential dangers resulting from the fact that, in order to publish certain types of speech content, the speaker would be first required to pre-register as a securities exchange, or risk severe penalties.

The think tank argues that the chilling effect resulting from “imposing an overly broad standard for registration, matched with severe penalties for non-compliance, will lead many creative and inventive Americans to self-censor.” 

For this reason, the proposed standard “will be immediately eligible for a pre-enforcement challenge on First Amendment grounds,” they said,

Coin Center recognizes that the final word over the constitutionality of the SEC’s proposed definition of exchange will belong to US courts.

“However, we urge the Commission to follow the counsel of former Commissioner [Roberta] Karmel as well as current Commissioner [Hester] Peirce, and to narrow the scope of the definition and avoid chilling the speech rights of Americans,” according to the think tank.


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