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SEC’s Uyeda Calls on Regulatory Clarity; BCAS & "Fully Decentralized"; Tornado Cash Update

SEC’s Commissioner Uyeda Calls for Regulatory Clarity

What happened?

On November 6, 2023, Commissioner Mark Uyeda of the Securities and Exchange Commission (SEC) delivered a speech that discussed the SEC’s approach to crypto and Uyeda’s concerns with it.

First, Uyeda discussed the absence of clear regulations to guide the use of its enforcement authority, especially when launching investigations and issuing subpoenas, stating: “investigations can be commenced on the minimal basis of ‘official curiosity’ rather than on probable cause.” He also added “when there is a low threshold to launching an investigation that lacks sufficient guardrails, the potential for abuse increases.”

Second, Uyeda lamented the SEC's attempt to create new law through enforcement actions rather than waiting for congressional action or proposing new regulations. This approach is problematic as it results in the creation of new rules––or broadening of existing ones––by bypassing the "notice and comment" procedure, which includes feedback from different stakeholders, according to Uyeda.

Furthermore, he highlighted three main areas in which the SEC failed to provide clear regulations while actively pursuing enforcement actions, which undermines the rule of law and due process for citizens.

What does this mean:

This speech sums up the core flaws in the SEC’s strategic decision, as a law enforcement agency, to pursue impact litigation in order to expand its jurisdiction. Doing so deprives the public of their right to provide input on new laws and fails to provide regulatory clarity. It also undermines the agency’s legitimacy and authority.

BCAS Dissent on MiCA Definition of Fully Decentralized

What happened?

On October 26th, Jonathan Galea, Chief Executive Officer of BCAS, published an analysis examining the concept of “fully decentralized” as used in Europe’s Markets in Crypto Assets Regulation (MiCA). Specifically, Galea criticized the European Securities Markets Authority’s (ESMA) proposed interpretation of the term. He argues that ESMA’s proposal is practically unachievable and legally problematic because it sets a standard that is impossible to achieve. Galea’s contention is that all human involvement cannot be eliminated from any technological system, touching on the fluid and vast spectrum of what is considered “decentralized.”

On another point, Galea argues that DeFi protocols are out of MiCA’s scope because its applicability is limited to businesses in which a service provider has client relationships with customers. He concludes that as long as no single entity controls a DeFi protocol or platform, or is essential for its operation, then it is outside the scope of MiCA.

What does this mean?

The debate around the meaning of the term “fully decentralized” is very welcome and also highlights challenges in applying rigid classifications to nuanced situations and evolving technologies. Legal ambiguity with respect to what falls under the scope of MiCA is in no one’s interests, as we Americans know all too well. The evolution of blockchain protocols demands continuous conversation between regulators and industry experts to establish clear and practical guidelines.

Court Dismisses Coin Center’s Tornado Cash Challenge

What happened?

In October 2022, the nonprofit group Coin Center and several individuals sued the Department of the Treasury and the Office of Foreign Assets Control (OFAC). They argued that designating Tornado Cash as a Specially Designated National (SDN) exceeded the agencies' authority under the International Emergency Economic Powers Act (IEEPA). Plaintiffs also alleged violations of the Administrative Procedure Act (APA) and the First Amendment. However, in an order last week, the U.S. District Court for the Northern District of Florida rejected these arguments.

The court held that OFAC had the authority to sanction Tornado Cash under the IEEPA's broad "any interest" language. It found that foreign nationals have an “indirect financial interest” in Tornado Cash protocols’ increased use and thus IEEPA’s limitation to foreign persons was met.

The court also held that the designation was not arbitrary and capricious because the designation aligned with sanctions policy goals of deterring threats to national security.

Additionally, the court ruled that designating Tornado Cash did not violate users' First Amendment rights, stating the order did not prevent spending money for political purposes or prohibit every avenue for anonymous donations. In upholding OFAC's authority to sanction Tornado Cash, the court granted summary judgment to the government.

What does this mean?

Coin Center appealed the ruling this week. The district court failed to consider that OFAC’s statutory authority is limited to transactions involving “property in which foreigners have any interest” — the developers’ interest, if any, is not relevant to an OFAC designation because (1) they are not the sanctioned foreign entities; and (2) the software is not their property and they shouldn’t be relevant to the analysis at all. Therefore, the Court’s ruling effectively allows the banning of Americans’ domestic transactions — a ban that is not allowed under IEEPA.

The software tool in question was legally used by Americans for purely domestic transactions to protect their own financial privacy, which is not only legal but outside the jurisdiction of OFAC’s authorities altogether. We appreciate Coin Center’s dedication to this case and for appealing the district court’s decision.


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