"Coding A First Amendment Right": The Electronic Frontier Foundation Defends EtherDelta

Colin Muller

The Electronic Frontier Foundation (EFF), a non-profit “digital rights” organization, has hit out against the recent Securities and Exchange Commission (SEC) charges against EtherDelta (ED) founder Zachary Coburn in a letter, calling the SEC “dangerously broad” and “unconstitutional."

EtherDelta is a decentralized exchange (DEX) allowing users to exchange Ethereum (ETH) ERC-20 tokens. Any ERC-20 token can be traded on the platform without permission, using only the token’s ERC-20 smart contract address to list.

The SEC charged Coburn with “Operating an Unregistered Exchange” for his role in developing ED (not in actually running it). He settled out of court, accepting almost $400,000 in disgorgement and penalties.

As an open platform, ED could and did (and continues to) host trading of the kinds of tokens that the SEC have been attempting to classify as securities. The SEC have met with some recent failures in this regard, however, and were denied an injunction against Blockvest last November by a San Diego District Judge.

A Key Precedent

The EFF see the Coburn case squarely as a violation of free speech, a right enshrined in the First Amendment of the US Constitution. They consider the SEC’s opinion, that “an entity that provides an algorithm” (e.g., writes code) could be in violation of securities laws, to be “an affront to the First Amendment.”

In response to the SEC’s actions, the EFF issued a letter to the SEC’s Secretary Brent Fields, outlining four potential violations of the First Amendment that could be gleaned out of the SEC’s actions: violating right of writing computer code; violating the protection of financial transactions; violating the freedom to write potentially controversial code without deploying it; and violating the right against “After-the-Fact Liability for Writing and Publishing Code.” The EFF also cited legal precedents to support all of these concerns.

Furthermore, the EFF voiced a concern that the SEC could “Chill Blockchain Innovation, Even Beyond Decentralized Exchanges” with such attempts at prosecution of coders. 

The EFF also specifically highlighted the pivotal 1995 legal case, Bernstein v. United States, a legal battle which marked the change in regulatory status of encrypted computer code; from being considered a munition (i.e., a weapon) that could not be disseminated, to a form of free speech.

OneCoin Denies Being a ‘Hybrid Ponzi-Pyramid Scheme’

The controversial OneCoin organization has recently responded to the Central Bank of Samoa, claiming it isn’t a “hybrid ponzi-pyramid scheme” as it doesn’t fir the definition of these schemes, and that it is a centralized, closed cryptocurrency.

According to the Samoa Observer, the Central Bank of Samoa claimed OneCoin is a “hybrid ponzi-pyramid scheme” that “laundered money through New Zealand to Samoa.” It also claimed the organization was targeting local residents through churches.

The organization, widely believed to be running a pyramid scheme using the cryptocurrency space, sent a statement to the Observer defending itself, claiming it’s neither a pyramid nor a Ponzi scheme. It’s worth noting individuals associated with OneCoin have been arrested and charged in various countries, including China and India.

In its response, OneCoin argued that Ponzi schemes see the revenue of old investors be “generated through the investment of new investors,” and that it doesn’t require its agents, known as Independent Marketing Associates (IMAs), to recruit others in order to earn bonuses.

Its defense revolves around IMAs not being “obliged to incur any additional expenses or recruit a new IMA,” and that they are rewarded for the “value of [their] sales,” not for recruiting new agents.

The organization added pyramid scheme regulations are these for “consumer protection,” and that its IMAs aren’t consumers. This, as when they join the organization they sign a contract classifying them as “self-employed business owners.”

The users which are part of the OneLife Network are NOT consumers. They are IMAs, meaning they are self-employed business owners.

As CoinDesk notes, OneCoin argues it isn’t a pyramid scheme because its agents aren’t seen as consumers and, as such, it can’t be classified under a dictionary definition of a pyramid scheme, and doesn’t force its IMAs to recruit new agents, although they’re incentivized to do so.

OneCoin, instead, argue it is a “centralized, closed cryptocurrency” with strict anti-money laundering (AML) and know-your-customer (KYC) rules, which make it “much more compliant than decentralized [cryptocurrencies].”

As reported, OneCoin’s leaders Ruja Ignatova and Konstantin Ignatov were recently indicted by the U.S. Attorney for the Southern District of New York (SDNY) on charges of wire fraud, securities fraud, and money laundering. Konstantin was arrested in March of this year.

Moreover, earlier this month former OneCoin investor Christine Grablis filed a lawsuit against the organization’s promoters, with Grablis’ attorney claiming OneCoin’s founders created a multi-billion dollar ‘cryptocurrency’ company based completely on lies and deceit.”