A New SEC Definition for 'Exchanges' Has Big Implications for Crypto
The U.S. Securities and Exchange Commission’s (SEC) proposal last week to expand the definition of an exchange is an opportunity for the crypto community to be heard, and we must seize it.
The SEC issued a proposal to, among other things, require “communication protocol systems” (or CPSs) to register with the agency and thereafter satisfy many ongoing recordkeeping, transaction-monitoring and reporting obligations. These CPSs would be defined as systems or platforms that “make available” the means for buyers and sellers of securities to “interact.”
Concern has swept across crypto that this broad and novel regulatory approach would bring crypto, and decentralized finance (DeFi) in particular, into the SEC’s regulatory perimeter. In that world, we could see a steady drumbeat of enforcement actions that would dramatically redefine the risk profile of running a U.S.-based crypto project.
Many concerns
It is imperative that each and every participant in the U.S. crypto market let their voice be heard. The SEC is accepting comments on its proposal through April 18 and cannot finalize the rule until each and every concern is considered and addressed. And concerns abound.
There are, of course, two threshold issues. First, which tokens, if any, are actually securities? On that long-standing issue, this proposal is silent. Second, did the SEC even intend to rope crypto into this proposed regulatory regime? Nothing in the 654-page rule mentions crypto, DeFi or blockchain protocols generally, and so there is room for doubt.
The SEC could resolve all our concerns by simply and expressly disclaiming that crypto is implicated. One hopes it chooses that path.
Greater oversight
Under Chairman Gary Gensler's leadership, the agency has signaled its intention to take on greater oversight of crypto. The key question has been how. Legislative, rulemaking and even enforcement approaches have been options for pulling crypto within the agency’s purview. If this proposal signifies the SEC’s first effort at such rulemaking, it presents the industry many bones to pick.
Foremost among these concerns is whether this rule exceeds the SEC’s authority. The SEC regulates exchanges, which traditionally has meant platforms where buyers and sellers actually buy and sell, but not ancillary services or platforms. This rule expands that perimeter to platforms where buyers and sellers might merely talk about buying and selling. That’s a huge change, and arguably one that the SEC doesn’t have congressional permission to make.
Beyond that, the rule is simply impractical. It requires someone who “makes available” a CPS to register. What “makes available” means is a mystery.
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