ConsenSys, Developer of MetaMask, Challenges SEC's Proposed Definition of 'Exchange' Citing Blockchain Misunderstandings

ConsenSys, Developer of MetaMask, Challenges SEC’s Proposed Definition of ‘Exchange’ Citing Blockchain Misunderstandings

ByEvans Karanja

Updated: 15 June 2023

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ConsenSys, a blockchain technology startup, has formally opposed the Securities and Exchange Commission’s (SEC) Notice of Proposed Rulemaking (NPRM) regarding the redefining of a securities “exchange” through the counsel of Bill Hughes.

The SEC made the proposal to categorize blockchain protocols as securities exchanges, a move that has since brought a lot of criticism from ConsenSys.

According to ConsenSys, the amendments were potentially applicable to blockchain-based systems, even though the Proposing Release, which contains more than 200 pages, does not mention cryptocurrencies, blockchain technology, or their applications.

The SEC’s modifications intend to apply to blockchain technologies, which ConsenSys claims would be illegal if made official in their current form. They assert that the reopening announcement improperly attempts to redefine exchanges in order to tighten broker-dealer registration, misinterprets the term “exchange” as defined by the ’34 Act, and fails to address important legal issues with the proposed revisions.

In one of the tweets, Hughes further emphasized that the idea needs to be clearer about both the workings of the larger ecosystem and blockchain technology.

ConsenSys has urged the SEC to completely remove the proposed modifications in light of these serious flaws. He stated

“jurisdiction at all over blockchain-based systems, and (2) the SEC’s limited understanding of blockchain technology and the dynamics of the blockchain ecosystem.”

Such systems fall outside a proper understanding of
“exchange” in the ’34 Act and so cannot be regulated under it. And SEC regulation in the broader blockchain context is further inappropriate given (1) the unresolved antecedent questions about the extent to which the SEC has

— Bill Hughes : wchughes.eth 🦊 (@BillHughesDC) June 13, 2023

According to their lawyer, he contends that these arrangements are not consistent with an accurate interpretation of “exchange” under the 1934 Act and cannot be governed by it.

What are the ConsenSys Concerns?

In a blog post published by Consensys.net, ConsenSys noted that the suggested amendments are too ambiguous to be legal and that the modifications create uncertainty about the intended scope of “exchange” by omitting key details from the current rule and substituting vague, poorly defined terms in that:

The amendments don’t give market participants a means to determine whether their activities help prospective buyers and sellers make a transaction or think about making one in the future.

ConsenSys also states that the amendments do not define the degree of causation which a group requires to be deemed to be “making available” a pre-existing, non-discretionary trading method.

The amendments do not mention the amount of knowledge necessary to join a “group of persons” disseminating these techniques.

Amendments also don’t specify how much they apply to platforms and participants living partially, significantly, or fully in foreign countries. Even worse, they don’t define what a “communication protocol” actually is.

In a letter written by ConsenSys to the SEC, ConsenSys requests the Commission to completely retract its proposal given the variety of flaws in the proposed modifications, stating that the Commission is unable to legitimately issue the modifications in their current form for the reasons mentioned in the letter.

Aside from withdrawing the proposed revisions, the SEC is not required to do anything given that there is no evidence that the present Rule 3b-16(a)’s scope has caused any harm. However, if it still feels that the rule needs changing, it must at least present a new proposal that has significant changes and is open to additional public discussion.

Furthermore, ConsenSys contends that SEC regulation in the broader blockchain context could be more suitable due to the Commission’s inadequate comprehension of blockchain technology and ecosystem dynamics.