The Electronic Frontier Foundation (EFF), a nonprofit organization that works to defend civil liberties in the digital world, published a post on its website outlining a public letter sent to the Securities and Exchange Commission (SEC) regarding the authority's November 2018 cease and desist filed against the decentralized exchange EtherDelta. While the SEC believed EtherDelta was operating as an unregistered securities exchange, the EFF feels the SEC's ruling could violate the First Amendment right to free speech.
At the time of the cease and desist ruling, Zachary Coburn, the exchange's founder, had agreed to pay $300,000 in disgorgement, $13,000 in prejudgment interest, and a $75,000 penalty. The SEC alleged in part that Coburn had "deployed the code for the first EtherDelta smart contract" and therefore "should have known that his actions would contribute to EtherDelta's violations and thus … caused EtherDelta to violate Section 5 of the Exchange Act."
In the EFF's post, Rainey Reitman, the organization's chief program officer, argues that because writing and publishing code is a form of protected free speech under the First Amendment, the SEC's EtherDelta ruling sets a dangerous example. Reitman writes:
"Even if the individuals never deployed the code and never actively maintained or promoted a decentralized exchange, this overly broad language implies the SEC could well expect people merely writing and publishing code to register as a national securities exchange or face liability."
The EFF was involved in the Bernstein v. Department of Justice court case, which established code as protected speech in the US. Essentially, graduate student Daniel Bernstein, had developed an encryption equation he called Snuffle, and wanted to publish "a) the algorithm (b) a mathematical paper describing and explaining the algorithm and (c) the 'source code' for a computer program that incorporates the algorithm." The State Department determined Snuffle was a munition under the International Traffic in Arms Regulations, and that Bernstein would need a license in order to publish the paper, source code, and instructions.
The Federal Court, however, denied the government's motion to dismiss Bernstein's case, and ruled that source code counts as free speech. The decision to make code free speech was based on the encryption equation's expression, rather than its functionality. As Judge Marilyn Hall Patel stated:
"Like music and mathematic equations, computer language is just that, language, and it communicates information either to a computer or to those who can read it … Thus, even if Snuffle source code, which is easily compiled into object code for the computer to read and easily used for encryption, is essentially functional, that does not remove it from the realm of speech. … For the purposes of First Amendment analysis, this court finds that source code is speech."
Along with freedom of speech, the EFF's public letter regarding EtherDelta also maintains that the SEC's decision may have violated the First Amendment's protection of financial transactions. The public letter notes:
"[D]ecentralized exchanges [like EtherDelta] also foster freedom of association by allowing for pseudonymous transactions that are resistant to censorship … Protection of such financial transactions is critical to ensuring public access to speech, as the ability to collect funds often plays a near-existential role in expression, online and offline."
Despite the EFF's past court dealings with digital expression, the post and open letter to the SEC isn't meant to be understood as the organization choosing a side. It seems the EFF hopes its open letter will, at the very least, prompt a response from the SEC to clarify that the regulatory body "recognizes that merely writing and publishing code is constitutionally protected, in order to ensure that blockchain innovation can continue to thrive."