June 13, 2023
Our suit leads with two major claims: (1) forcing ordinary people to collect highly intrusive information about other ordinary people, and report it to the government without a warrant, is unconstitutional under the Fourth Amendment.
The first claim is about privacy and our Fourth Amendment right to be secure from unreasonable searches and seizures.
The Fourth Amendment already has some huge carve-outs that leave people with precious little space for privacy. For example, under the third-party doctrine once you hand private information over to a bank or social media company, you lose your right to prevent warrantless searches of that information.
The 6050I provision, theres no third party to a transaction then theres no third-party doctrine to obviate the need for warrants.
In this these excerpt of CoinCenter, an NGO law advocate, there is a case filed against the Treasury because it is claiming that the Third Party Doctrine applies to miners and validators on the Ethereum Network.
My argument as follows : The critical underlying problem in ats designation of exchange status to DeFi, are complementary and synonymous with 6050i amendment, they reinforce each others enforcement they overlap
1) This not good for american national security, civil liberties, or economic success.:
The fundamental technology of DeFi primitives is a global borderless protocol for the entire world, and 170+ jurisdictions, it is not gated, the front end websites do not control smart contract technology, are not necessarily hosted on centralized hosting mechanisms, nor do they need to be, nor will they be in many instances, these front ends constitute speech and behave similar to bloomerberg terminals, newspapers, and search engines, and are technologically and from a civil liberties perspective, interchangeable with Etherscan. Etherscans defense under the 1st and 4th amendment, and other defenses of it being an exchange are likely to be very solid cases won in court, since etherscan is clearly and certainly a search engine and not an exchange.
Facts and circumstances may apply to solicitation, and some protocols and front end websites may solicit, but many will not, and many front ends will be general purpose search engines such as Etherscan.
Because front ends and smart contracts are global primitives, they actually cannot be shut down, and even Panama Paper style enforcement, which is to say global bilateral treaties and Fatca regulations will not be remotely enforceable directly, and are likely to deeply sour geopolitical and diplomatic relationships with the united states and its allies.
The US can felonize its own citizens, and it can deeply hurt liquidity for most protocols and front ends by harassing and enforcing banking relations in ally countries or most Ofac countries, but this is again not in our best interest for national and economic security, and unlike banks, will not actually fully work on smart contracts.
2) This is completely costly and extraneous, when anti-money laundering law and counter terrorism financing works on most global centralized crypto offramps and exchanges, and most public smart contract activity on non private chains like ethereum are fully visible to law enforcement and policy maker through chain analysis, ciphertrace, and other chain surveillance firms. Numerous FinCen laws and their equivalent in latam/asia and EU partners UK, australia, work to help with these concerns already.
These ats laws and 6050i effectively introduce redundant and deeply costly barriers to what should remain a global primitive interface in DeFi, to do the very opposite of what DeFi is intended to do: to reemphasize this, conglomerate barrier to entry, trade barrier, and deeply custodial practices of the NYSE are being forced onto DeFi, as a de facto outlaw of the technology, despite the enforcement mostly being ineffective to oversea partners
3) the consequence of these laws will be bad long term for national and economic security of the united states as most countries outside western europe and the US embrace more practical security law and aml law at the offramps of crypto, or at the disclosure or business entity level of protocols, while leaving the global primitives on front ends to function mostly as intended. The US will not be able to litigate or enforce this competition away through SEC lawsuits or Fatca, or bilateral treaties, which will cause us to fall a decade behind in financial tech ramps and fundamental shifts in financial technology and global monetary policy.
The SEC is alienating entire generations of white collar workers and engineers and capital and entrepreneurial individuals, who will obviously build unicorn companies and technologies in not only emerging markets, but likely Dubai, London, Singapore, Hong Kong, Beijing, Shanghai, Istanbul, Seoul, and so on.
There are clearly pragmatic ways to extend investor protection to american retail consumers that do not have such diplomatically adverse outcomes, and allow for disclosure regimes, and even stipulations against organized business entities, even unassociated incorporations of business actors where facts and circumstance apply-- without ruining the underlying technology of global smart contract primitives.
The united states approach to financial enforcement has always centered on shutting down actors and exchanges, but that simply is no longer directly relevant to this technology, or again really even necessary given the immense dependence of crypto on offramps.
This continues to have deeply alienating effects of driving capital away from legitimate oversight and regulatory protections, fueling an interest in the most probelmatic fraud ridden projects of NFTs, memecoins, and extremely low quality projects, while pushing rational projects into overseas markets.
What should actually happen, are effective regulatory oversight for bluechip company to build in the usa and offer products on DeFi platforms and centralized exchanges interchangeably that have a reputation of quality and oversight and consumer protections, there should be a clear path for Coinbase and Kraken to be digital asset security brokers, Solana, Matic and Cardano should be able to be securities without it breaking the technology, without it causing a delisting. There should not be a delisting, because the exchanges should not have these issues becoming registered, and it should not preclude uniswap or DeFi from working with these tokens, Uniswap and other protocol do not need to be an exchange, because it is redundant, it functions as a global second hand or third hand market, and the SEC is not effectively, and constructively regulating at the entity level, the centralized exchange level, the level of solicitation and business operation and US incorporation to create incentives for most global investors to choose bluechip projects on both Centralized exchange and DeFi, over far less reputable projects.
It Is difficult to overstate how the Treasury, CFTC, and SECs highly atavistic laws and the underlying norms and practices of the CME and NYSE are not capable of serving the technology of global smart contract primitives, and the extent to which this is going to create capital flight.
The US positioning itself in a global hunt to shut down all non compliant and non-know your customer/pseudo-anonymous DeFi protocols extrajudicially, extralegally, extrajurisdictionally is not going to have a positive diplomatic or economic outcome.