Island Smuggler's text: Response: Kneel Island Smuggler to cancel an effect that would move a card out of a player's dead or discard pile.

Mel's Scheme text: You may play characters out of your discard pile during the marshalling phase as if they were in your hand.

Opponent tries to use 4 gold to play something out of discard pile. Smuggler doesn't require a triggered effect, which would seem to indicate he could cancel a passive/constant effect. Can I cancel the playing of the character?

Playing a character is a game mechanic and is not cancelable. Mel's Schemes creates a constant effect, so there is no point of initiation to cancel anyways.

For the record, Island Smuggler can cancel passive effects

That fact just doesn't come into play here because cancels must come between the initiation and resolution of an effect. Constant effects do not initiate or resolve - they are simply "true" - so they cannot be canceled.