The United States (SEC) has decided to revisit the proposal to redefine an “exchange” under the agency’s rules.
The proposed rule amendment could bring crypto market participants in decentralized finance (DeFi) under the regulatory scrutiny of the SEC.
This move could benefit investors and markets by modernizing the rules that define an exchange and bringing certain brokers under additional regulatory scrutiny, said SEC Chair Gary Gensler in an April 14 open meeting with SEC commissioners and staff.
Gensler added that this amendment would account for the evolving nature and electronification of trading platforms in the last 25 years.
The proposal states that 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.
Gensler pointed out that many crypto trading platforms operate as exchanges today, regardless of this reopening release that the SEC is considering.
These platforms match orders of multiple buyers and sellers of crypto securities using established non-discretionary methods, which is the definition of an exchange. The SEC Chair emphasized that most crypto trading platforms today meet the definition of an exchange.
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 that there was “so much ambiguity” regarding the SEC’s current treatment of securities. Peirce was also concerned that the proposed rules might encourage centralization in the DeFi space, which she thought would not benefit the American public.
“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.”
The SEC proposed similar amendments in January 2022, which kept 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.
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 days following publication in the Federal Register.
SEC targets Defi
In conclusion, the SEC will revisit the proposal to redefine an “exchange” under its rules to bring crypto market participants in DeFi under regulatory scrutiny.
While SEC Chair Gary Gensler believes this move could benefit investors and markets by modernizing exchange rules, SEC Commissioner Hester Peirce is concerned that it might encourage centralization in the DeFi space.
The public comment period for the proposed amendment will be open for 30 days following publication in the Federal Register.