SEC targets DeFi in vote to revisit proposal concerning the definition of ‘exchange’

The United States Securities and Exchange Commission has announced it will be revisiting the proposed redefinition of an “exchange” under the agency’s rules — a move that could include crypto market participants in decentralized finance, or DeFi.

In an April 14 open meeting with SEC commissioners and staff, SEC Chair Gary Gensler said the proposed rule amendments could benefit investors and markets by bringing certain brokers under additional regulatory scrutiny as well as “modernizing” rules that define an exchange. Under the proposal, an “exchange” would be more closely defined as a system that “bring[s] together buyers and sellers of securities through structured methods to negotiate a trade” and explicitly include DeFi.

“This would account for the evolving nature and electronification of trading platforms in the last 25 years,” said Gensler.

The commission proposed similar amendments in January 2022, keeping the comment period for the public open until June. Some crypto advocacy groups criticized the SEC’s actions at the time, suggesting it was an overreach of the commission’s authority that could jeopardize participation in the space.

Gensler added:

“Given how crypto trading platforms operate today, many of them currently are exchanges regardless of this reopening release we’re considering today. These platforms match orders of multiple buyers and sellers of crypto securities using established non-discretionary methods. That’s the definition of exchange, and today, most crypto trading platforms meet it.”

SEC Commissioner Hester Peirce, also known as “Crypto Mom” by many of her pro-crypto policy positions, raised concerns about the rules regarding trading platforms that do not handle tokens qualifying as securities, or how to address operators that move from securities to non-securities trading. She added there was “so much ambiguity” regarding the SEC’s current treatment of securities.

“It’s possible that operating a system that uses these technologies to perform exchange activities under the proposed rules in a manner that complies with applicable regulations could significantly reduce the extent to which the system is decentralized,” said Peirce. “Have we thought about how forcing centralization would benefit the American public? […] It seems perverse to me that we would be encouraging centralization.”

Related: US SEC seeks to expand its Crypto Assets and Cyber Unit

Following the meeting, the SEC reiterated that DeFi projects fall under the commission’s current rules. The U.S. Treasury Department also targeted DeFi services in an April 6 warning regarding money laundering and terrorist financing. 

The public comment period for the proposed amendment will be open for 30 following publication in the Federal Register.

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