Hedera’s Recommendations to SEC on Proposed Amendments to Exchange Act Rule

• Hedera expresses concerns about the proposed amendments to Exchange Act Rule 3b-16, fearing negative consequences for the DLT industry in the US.
• Hedera highlights the lack of clarity in defining the “group of persons” responsible for making available a communications protocol.
• Hedera warns against extending liability to infrastructure providers like DLT network validators, as it could hinder decentralized peer-to-peer activity

Hedera, a leading decentralized public network, recently submitted its recommendations and feedback to the U.S. Securities and Exchange Commission (SEC) regarding the proposed amendments to Exchange Act Rule 3b-16. These amendments aim to redefine the term “exchange” and carry potential unintended consequences for the emerging Web3 and distributed ledger technology (DLT) industries.

In collaboration with the Hedera Governing Council, Chairman Brett McDowell outlined significant concerns and provided crucial insights to protect the development and innovation within the United States’ Web3 and DLT sectors.

Hedera Addressing Potential Unintended Consequences

“We strongly believe the proposal to amend Exchange Act Rule 3b-16(a) to include within the definition of “exchange” a group of persons that “makes available… communications protocols” will have unintended negative consequences for the development of the DLT industry in the US.”

Hedera’s response focuses on several key points outlined in their recommendations:

1. Clarification of Contributors: Hedera highlights the lack of clarity in defining the “group of persons” responsible for “making available” a communications protocol that acts as an exchange. They raise concerns that developers and software creators, even if their software is open-source and used for non-securities transactions, may be held liable if the software is later used to exchange securities.
2. Extending Liability to Infrastructure Providers: Hedera draws attention to the unintended extension of liability for securities activities to infrastructure providers, such as DLT network validators. They argue that this proposal fundamentally changes the role of DLT network validators from passive recorders to intermediaries, posing compliance challenges and potentially stifling the benefits of decentralized peer-to-peer activity.
3. Lack of Defined Compliance Process: Hedera points out that the proposed amendment lacks a reasonable and defined path to registration and compliance with the rule. They raise concerns about the vague definition of the “group of persons” and the absence of a solution for infrastructure providers like DLT network validators to register and comply with regulatory requirements.

Hedera strongly believes that if validators and developers of peer-to-peer networks supporting smart contracts are burdened with liability and regulation without a clear compliance process, it will hinder their operations in the United States. This would result in a denial of the technology’s benefits to U.S. citizens and push valuable technology jobs and expertise to other jurisdictions.

Hedera encourages the SEC to reduce the scope of the definition of an exchange and provide precise guidance that aligns with their legislative authority, thereby protecting the innovation and growth of the Web3 and DLT industries.