To beat U.S. regulators, DeFi needs to design itself in accordance with the First Amendment

The best thing about America is freedom of speech. I mean this with the utmost seriousness. Having lived in England for 15 years, I have seen and lived with the alternative, where making true statements of fact (Campbell v Mirror Group Newspapers, YMA v PJS) and various other types of religious, political, or philosophical expression (right wing rhetoric, left wing rhetoric, protesting, praying silently), and seen and read about probably hundreds of arrests for this kind of speech. Indeed, a story from 2015 in the Telegraph indicated that five Internet trolls were being convicted every single day in England and Wales – for Internet trolling. England might have better crypto laws than we do, but it’s not a great place to have intense opinions.

Without going into too much background as this is a post about crypto and not English free speech rules, in England back in the day, as now, the expression of a true statement of fact is not necessarily protected by law simply because the fact is true. Legally, this has been the case for at least 500 years, and likely for the entirety of English history before that. Back in the 1700s, for example, a number of delicts punished the sort of speech which we see on Twitter daily and, at least for the members of the crypto bar I know, post daily. These include seditious libel, being speech which was either true or false but tended to give rise to disaffection among the public against the King and his ministers, and scandalum magnatum, a “fake news” law where slandering a great man of the realm was not punishable as a tort but also as a misdemeanor. (If the U.S. crypto bar teleported back to 1693 England, we’d be in a lot of trouble on a pretty regular basis.)

Then, as now, prosecutorial discretion played an important role in choosing which libels were prosecuted and which were not, and if so, how serious the punishment should be. If the government were really unhappy with you, they would simply take the fact pattern for seditious libel and charge you with treason; see e.g. the case of printer William Anderton from 1693. Anderton was charged with High Treason “for that he did Compose, Print, and Publish Two Malicious and Treasonable Libels,” including a rather interesting-sounding one titled “A French Conquest neither desirable nor practicable,” and in which was contained “the Rankest, Vilest, and most malicious Treasons that ever could be Imagined by any man to be put in Paper.”

Sounds bad! So bad that Anderton was, subsequently, executed at Tyburn; his confederates, however, being charged with merely seditious libel, were allowed to keep their lives.

This was the background of the First Amendment, which states in relevant part that “Congress shall make no law… abridging the freedom of speech, or of the press[.]”

The First Amendment was written with cases like William Anderton’s in mind and was, in the words of 20th century American legal scholar Zechariah Chaffee, designed to “make further prosecutions for criticism of the government, without any incitement to law-breaking, forever impossible in the United States of America.” U.S. courts got the memo and, unlike British courts which have for decades consistently failed to uphold the legal obligation to preserve free speech contained in the UK Human Rights Act, our courts guard speech jealously. As new forms of speech and expression emerge, the courts, generally quite rapidly, move to protect these new forms of expression from state interference or control.

This includes software and now, notably, cryptography. See e.g. Bernstein v. United States. That includes the software you write. Just because you write software, however, doesn’t mean that all of your business activities carried on subsequently are also protected speech – see e.g. the somewhat silly free speech kerfuffle around Tornado Cash, a business in all but name that happened to have a smart contract at its core. There is a difference, a big one, between using software in a (regulated) business and publishing software as a form of (unregulated) creative expression.

Ever since Opyn, 0x, and Deridex got dinged by CFTC for failing to register as, variously, Futures Commission Merchants, Designated Contract Markets or Swap Execution Facilities, I’ve had a couple of calls or podcasts a week with friends and clients alike wondering how, exactly, to adapt.

I think the answer is simple: First Amendment that shit, redesign how we make DeFi applications and get not most of the centralization out of the picture, but all of it. This requires complete separation of transaction execution and data provision, with the transaction execution needing to happen entirely on-chain and client-side, and the data provision needing to come from a third party service like a blockchain explorer which plays no role in transaction execution and has no connection to the wallet running client-side.

I talked about this with a space full of Chia folks a couple of weeks ago; a recording of that is below. Summing up that conversation for this blog post, DeFi’s current vulnerabilities arise from the fact that data and transaction execution are carried out together, for the sake of convenience and ease of use, by centralized facilities of some kind, usually in the form of a hosted user interface which the overwhelming majority of ordinary users must interact with in order to utilize the functionality of an AMM.

The UI – the centralized server – is what must disappear from all AMMs, following the “Space Marmot Test” I describe in the tweet and recordings below. DeFi businesses must cluster into two different types: (a) FOSS developers of DeFi software which runs entirely client-side, and (b) public data sources which those DeFi apps can hit.

While the law is a moving target and depending on the product your app aims at facilitating transactions in and whether you as a market participant might also be regulated, in terms of coming up with software, protocols, and ways of doing business that are likely to survive regulatory attack, you can’t do much better than running a business which is engaged in First Amendment protected expression.

What that looks like in terms of a finished software product utilizing distributed cryptosystems, I leave to brighter minds than my own. What I do know is that we can decentralize all the things – for real this time – and, if we do, our ecosystem will be much harder to kill.

What are we waiting for?

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