Oct. 6, 2023
The SEC is proposing to update the rule to include audits from "any other entity". Cryptocurrency is a new and evolving asset class, and it is not clear that the SEC has the authority to regulate cryptocurrency or to require audits of cryptocurrency exchanges and other entities that hold cryptocurrency for their clients. There are a number of constitutional and legal arguments that can be made against the SEC requiring audits of cryptocurrency exchanges and other entities that hold cryptocurrency for their clients. Constitutional Arguments The SEC does not have the authority to regulate cryptocurrency. The SEC's authority to regulate securities is derived from the Securities Act of 1933 and the Securities Exchange Act of 1934. These statutes define a security as an investment contract. An investment contract is a security if it meets four elements: An investment of money In a common enterprise With an expectation of profits Solely from the efforts of others Cryptocurrency does not meet all four elements of an investment contract. For example, cryptocurrency is not a common enterprise, and investors do not expect profits solely from the efforts of others. Therefore, the SEC does not have the authority to regulate cryptocurrency under the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC rule violates the First Amendment. The First Amendment protects freedom of speech. This includes the right to express commercial speech. Cryptocurrency is a form of commercial speech. It is a way for people to raise money and invest in new technologies. The SEC's proposed rule would restrict people's ability to invest in cryptocurrency. This would violate the First Amendment. Legal Arguments The SEC rule is vague and ambiguous. The SEC's proposed rule does not define what constitutes an "any other entity" that would be subject to the audit requirement. This makes the rule vague and ambiguous. The SEC rule is overbroad. The SEC's proposed rule could be interpreted to require audits of a wide range of entities that hold cryptocurrency for their clients, including cryptocurrency exchanges, wallets, and custodians. This is overbroad and would impose an undue burden on the cryptocurrency industry. The SEC rule is discriminatory. The SEC's proposed rule would apply only to entities that hold cryptocurrency for their clients. This is discriminatory because it would not apply to entities that hold other types of assets, such as stocks, bonds, and real estate. In conclusion, there are a number of constitutional and legal arguments that can be made against the SEC requiring audits of cryptocurrency exchanges and other entities that hold cryptocurrency for their clients.