U.S. SEC To Introduce Proposal Targeting DeFi Crypto Exchanges

On Apr 15, 2023

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The United States Securities and Exchange Commission (SEC) has shifted its attention from individual organizations to targeting decentralized finance (DeFi). In the latest development, the regulator has revisited a 2022 proposal to fill in the gaps in the regulatory sector. Specifically, the goal of the SEC is to prevent unregistered platforms from offering securities trading unless they have identified with the agency as a broker of exchange.

SEC targets DeFi in vote to revisit proposal concerning the definition of ‘exchange’
🧵👇 pic.twitter.com/ZizsmTrG0y
— Ben DeLisi (@realbendel) April 14, 2023

On Friday, April 14, the agency’s five-member commission voted three against two in favor of reopening the comment period on amendments. They want to adjust the definition of ‘exchange’ under the Exchange Act Rule 3b-16.

The Exchange Act defines an exchange as “an organization, association, or group of persons.” However, the definition hardly applies to DeFi, wherein the marketplace is software and the possibility of participants knowing each other is rare.

According to the filing, the public has 30 days to submit comments following its publication in the Federal Register. The window closes on June 13. It is important to note that public feedback will play a role in the final draft of the proposal.

SEC Underscores The Need For Cryptocurrency Exchanges And DeFi Platforms To Register

The proposal to be amended is aimed at emphasizing the need for cryptocurrency exchanges and DeFi platforms to register with the SEC. It is worth mentioning that the revised proposal comprises language specifically targeted at covering digital assets and the DeFi space. According to the regulator, this falls under the jurisdiction of the SEC.

Commenting on the matter, Chairman of SEC Gary Gensler said,

Given how crypto trading platforms operate, many of them currently are exchanges, regardless of the reopening release we’re considering today.

Gensler believes the existing definition of exchange already covers most crypto platforms, including those claiming to be decentralized.

Prior to the meeting, Gensler said that the new proposal would be in the best interest of investors because it would be bringing several platforms in the decentralized finance space within the scope of the Securities and Exchange Commission.

An economist with the SEC, Jessica Wachter, highlighted that most of the newly covered players in the crypto scene would probably try to secure an exemption based on the Alternative Trading System.

One of the five commissioners of the SEC, Hester Pierce, has criticized the proposal and SEC’s current leadership.

SEC Commissioner Hester Peirce Says Exchange Act ‘Undermines First Amendment’

In Hester’s words, the “Commission aggressively expands its regulatory reach to solve problems that do not exist.”

Rather than embracing the promise of new technology as we have done in the past, here we propose to embrace stagnation, force centralization, urge expatriation, and welcome extinction of new technology.

Further, she said during the meeting that she was displeased with the agency’s decision to alter the proposal. In her opinion, the revised proposal would only serve the renowned personalities in traditional finance. Hester also accused the Securities and Exchange Commission of being “uninterested in facilitating innovation and competition in the financial markets.”

In her statement, Hester shared that the SEC failed to define a “Communication Protocol System” but instead resolved to ask commenters if they wanted more examples and what type of examples they wanted.

Moreover, the commissioner believes the SEC used the term without considering the impact it could have on hundreds of systems and the potential market disruption. Furthermore, she said that the standards for decentralized activity, as stipulated under the proposal, imposed impractical standards for decentralized activity on those involved.

In her opinion, the SEC did not consider whether compliance was possible before making the rules, adding that this indicated an attempt to regulate DeFi into non-existence.

Rather than [the SEC] responding to commenters’ serious concerns about the breadth, ambiguity, unworkability, and potential disruption of the proposal, the reopener, with few exceptions, doubles down on the defects identified by commenters.

A few stakeholders in the crypto playing field have come forward to hail Hester’s statement, addressing the SEC’s increased scrutiny of crypto. The financial regulator has come under heavy criticism for its “regulation-by-enforcement” approach toward the industry.

Noteworthy, the regular will implement the proposal after the majority approves.

SEC to build capacity for its crypto crime department

Other than altering the regulatory language, the Securities and Exchange Commission is also doubling down on enhancing its crypto crime department. This is part of its effort to crack down on digital assets.

The Division of Enforcement – Crypto Assets and Cyber Unit seeks to hire General Attorneys in New York, NY; San Francisco, CA; and Washington, DC. For more information and to apply, click here: https://t.co/OI6YQk5doI.
— SEC Careers (@SEC_Careers) April 10, 2023

As stipulated in the above tweet by the careers department of the agency, the Securities and Exchange Commission is looking to recruit three additional general attorneys for its New York, San Francisco, and Washington, DC outlets.

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