SEC Seeks to Regulate DEXs Under Existing Exchange Laws, Crypto Mom Responds

SEC Seeks to Regulate DEXs Under Existing Exchange Laws, Crypto Mom Responds

The Securities and Exchange Commission (SEC) is furthering its plans to bring crypto exchanges under its regulatory purview – including DeFi exchanges. 

The agency has announced that it is reopening an old proposal surrounding consumer protection laws to explicitly put digital asset trading within its scope. 

Regulating DeFi

Per a press release from the SEC on Friday, the reopening reiterates that existing rules governing securities exchanges also apply to digital asset trading platforms and “so-called “DeFi” systems.”

“I believe this supplemental release will help address comments on the proposal from various market participants, particularly those in the crypto markets,” said SEC Chair Gary Gensler in comments accompanying the press release. 

The original proposal in January 2022 sought to extend existing exchange laws to systems that “provide protocols to bring together buyers and sellers for trading any type of security.” Those systems would be required to register as exchanges or broker-dealers and comply with regulations for Alternative Trading Systems. 

While the proposal didn’t explicitly mention crypto or DeFi, the ambiguity of its language drew criticism from the popular crypto exchange Coinbase, as well as crypto-supportive SEC commissioner Hester Peirce. The newly proposed changes would make clear crypto asset trading and DeFi exchanges are explicitly covered.

Gensler has long argued that the vast majority of crypto assets fall under securities laws, and that crypto exchanges should be subject to the same regulations and rules as other trading platforms. Peirce, by contrast, frequently criticizes the chair for attempting to fit a new and novel industry into a ruleset it wasn’t built for.

Crypto Mom Responds

In a written response to Gensler on Friday, Peirce objected to the latest amendments, stating that they serve to “embrace stagnation, force centralization, urge expatriation, and welcome extinction of new technology.”

“We stretch the statutory definition of “exchange” beyond a reasonable reading to reach a poorly defined set of activities with no evidence that investors will benefit,” she wrote. 

Her statement also argued that applying existing rules to DeFi would create “confusing and unworkable standards” for network participants, including the miners and validators of the blockchains upholding its related protocols. Furthermore, she questions the ability of DeFi participants to satisfy exchange or broker-dealer registration requirements, or why such registrations make sense for DeFi at all. 

“I wish we had proceeded differently,” she said. “We also could have benefited from roundtables to bring together people from all parts of our market to discuss these issues and help us understand them better.”

Peirce mocked the SEC’s decision in a tweet on Friday, asking if she would need to register as an exchange with the SEC to wear a shirt republishing software code. 

Last week, the Treasury Department published a report outlining some of the national security and illicit finance risks presented by DeFi. 

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