Crypto advocates file brief against SEC's investor tracking database

The Consolidated Audit Trail would gather a monumental amount of data, and more than it is meant to when it exposes the identity of crypto wallet holders.

The DeFi Education Fund and the Blockchain Association jointly filed an amicus brief in a case brought by two individuals and the New Civil Liberties Alliance (NCLA) against the United States Securities and Exchange Commission (SEC), its chairman Gary Gensler and the Consolidated Audit Trail (CAT). The complaint does not mention cryptocurrency or blockchain, but the organizations argue that the CAT could have a profound negative effect on crypto users.

The CAT is a database that was first proposed in 2010 and became operational in April. According to its website, the CAT “tracks orders throughout their life cycle and identifies the broker-dealers handling them, thus allowing regulators to efficiently track activity in Eligible Securities throughout the U.S. markets.”

A bad rule that’s worse on a blockchain

The SEC proposed the 203-page rule that created the CAT in 2010 and passed it in 2012. The database is funded by its participants — the Financial Industry Regulatory Authority (FINRA) and 26 national securities exchanges. The CAT soon provoked concerns about privacy and government overreach. The NCLA said:

“This class-action complaint challenges SEC’s shocking arrogation of power to impose dystopian surveillance, suspicionless seizures, and real or potential searches on millions of American investors.”

The NCLA filed its suit in April. The case has attracted over 50 amicus curiae briefs. The DeFi Education Fund and the Blockchain Association said in their brief that the database exposes more information about investors using blockchains than it was designed to, due to the transparent nature of public blockchains. It explained:

“The CAT […] connects personally identifying information with wallet addresses that reveal blockchain-based user transactions. Thus, anyone with access to the CAT would be able to see not just a person’s securities transactions, […] but all of that person’s blockchain transactions in the past, present, and future.”

Something to displease everyone

The CAT has also been criticized as a security risk. It is a “honey pot” for hackers and freely accessible by thousands of SEC and member employees. However, as the Securities Industry and Financial Markets Association trade group stated, the lack of public access to the database means the SEC violated the Administrative Procedure Act if it were to use the database for rulemaking, as all data used for that purpose has to be publicly accessible.

Related: Advocacy groups warn of ‘adverse repercussions’ for crypto in case against Tornado Cash co-founder

The CAT is also being challenged in another court by Citadel Securities and the trade group American Securities Association. The NCLA was also instrumental in bringing the case to the Supreme Court that led to the overturning of the Chevron deference. 

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