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Regulatory battle intensifies: US SEC eyes DeFi platforms as exchanges

Regulatory battle intensifies US SEC eye DeFi platforms as exchanges

On Friday, the United States Securities and Exchange Commission (SEC) reopened its consultation on a proposal to broaden the definition of an “exchange” to include cryptocurrency platforms that use “communication protocols” (platforms that use structured methods to facilitate the negotiation of trades between buyers and sellers of securities).

The move comes after pushback from the cryptocurrency industry, which is concerned about being trapped by the new regulations.

The SEC voted 3-2 to seek additional public feedback after crypto firms criticized the plan for being ambiguous and aimed at encompassing decentralized finance (DeFi) platforms.

The proposal, initially introduced in January 2022, aims to capture more venues beyond conventional exchanges that combine orders from multiple buyers and sellers in a marketplace.

In an official statement on April 14, the SEC chair Gary Gensler said:

“Investors in the crypto markets must receive the same time-tested protections that the securities laws provide in all other markets. Calling yourself a crypto platform is not an excuse to ignore the securities laws. Calling yourself a DeFi platform is not an excuse to defy the securities laws.”

Likely, some DeFi platforms may fall under the proposed definition, but SEC officials indicated that others may already be considered exchanges under the existing one. The officials estimated that about a dozen cryptocurrency firms would fall under the expanded definition, but they did not provide any specifics.

A “mandate to protect investors”

Further, the SEC chair underlined that crypto platforms will not escape regulation:

These platforms match orders of multiple buyers and sellers of crypto securities using established, non-discretionary methods. That’s the definition of an exchange—and today, most crypto trading platforms meet it. That’s the case regardless of whether they call themselves centralized or decentralized.<…>Yet these platforms are acting as if they have a choice to comply with our laws. They don’t. Congress gave the Commission a mandate to protect investors, regardless of the labels or technology used.

The decision to reopen the comment period for 30 days was an unusual move, with the commission generally deciding behind the scenes if extending a public comment period is necessary. The meeting highlighted the ideological divide among the commissioners, with both Republican commissioners dissenting.

Commissioner Hester Peirce argued that the reopening “doubles down” on an initial proposal that would force centralization and undercut new technologies. “Rather, today’s commission aggressively expands its regulatory reach to solve problems that do not exist,” she said.

As Finbold previously reported, in June 2022 the SEC chair was already saying that one of the financial agency’s goals is to seek a unified crypto ‘rule book’ to avoid fragmented regulation. Later, in February 2023, Mr. Gensler spoke about using ‘all means available’ to bar crypto from the mainstream.

Featured image via US SEC YouTube.

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