On Jan. 26, the United States Securities and Exchange Commission proposed amendments to Rule 3b-16 under the Exchange Act that lacks any mention of digital assets or decentralized finance, which could adversely affect platforms that facilitate crypto transactions. Some cryptocurrency advocates — including SEC Commissioner Hester Peirce — believe that the commission’s extended definition of an exchange could thrust an entire class of crypto entities under the regulator’s jurisdiction, subjecting them to additional registration and reporting burdens. How real is the threat?
The proposed change
The amendments proposed by the regulator dramatically expand the definition of what an exchange is while eliminating the exemption for systems that merely bring together buyers and sellers of securities while not providing facilities for order execution, which are currently not obliged to register as an Alternative Trading System — a class of trading platform within the SEC’s purview. Furthermore, the proposed rule includes “communication protocol systems” within the scope of the term “exchange.”
What it means in practice is that the SEC is claiming regulatory turf over a broad range of platforms that were previously operating outside of its jurisdiction. A particularly worrying point is that decentralized finance protocols could well fit into the definition of communication protocol systems that bring together “buyers and sellers of securities using trading interest.” The commission, as is well known by now, is keen on characterizing most digital assets as securities.
In a statement that followed the publication of the proposed amendments, SEC chairman Gary Gensler specifically emphasized his support for “the element of this proposal that modernizes the rules related to the definition of an exchange to cover platforms for all kinds of asset classes that bring together buyers and sellers.”
The agency’s rationale for introducing the amendments is that the definition of “exchange” must be updated in light of recent technological developments, most notably digitization of securities marketplaces. The proposal states that the new definition is supposed to be “flexible enough to accommodate the evolving technology.”
The SEC also wants to ensure that new digital players remaining unregulated do not enjoy an unfair competitive advantage over established exchanges that carry the compliance burden.
What does it mean for crypto?
Pro-crypto SEC Commissioner Hester Peirce was among the first opinion leaders to ring the alarm over the proposal. She offered a dissenting statement in which she called the document “too wide-ranging.” In follow-up remarks, she expressed her concern that, given the securities regulator’s recent eagerness to regulate all things crypto, the amendments could potentially reach DeFi protocols.
If the new rules are adopted and DeFi systems end up being treated as exchanges, a host of hard questions would arise,…
Read More: cointelegraph.com