Decentralized finance (DeFi) faces increased regulatory scrutiny as the Securities and Exchange Commission (SEC) reopens the comment period on proposed amendments to the definition of an “exchange” under Exchange Code Rule 3b-16. The proposed amendments were initially floated in January 2022, and the SEC reopened the comment period in May 2022, which closed on June 13, 2022.
DeFi’s future in jeopardy?
The SEC’s proposal aims to provide “regulatory oversight” of platforms that trade crypto assets for what they call “securities,” including DeFi protocols, that run on a decentralized, peer-to-peer network.
According to the announcement, the proposed modifications would subject DeFi protocols and other systems that trade in “crypto-asset securities” to additional regulatory requirements, such as registering as national securities exchanges or complying with reporting and record-keeping obligations. SEC Chairman Gary Gensler commented:
I believe this supplemental release will help address the comments on the proposal from various market participants, particularly those in the crypto markets.
In his statement, SEC Chairman Gary Gensler further emphasized that many cryptocurrency trading platforms already fall within the current definition of an exchange and are therefore subject to existing securities laws. Gensler also claimed that investors in the cryptocurrency market “deserve the same protection” as those in other markets and that the SEC’s proposed regulations are intended to provide that.
Additionally, Gensler noted that the proposed regulations are subject to public comment and encouraged investors and other stakeholders to provide input on all aspects of the proposal. He emphasized that the SEC is committed to ensuring that the crypto market operates in a “fair and transparent manner” and that these regulations are an important step in achieving that goal.
According to the announcement, once the reopening release is posted to the Federal Register, the 30-day suspension period will begin. During this period, interested parties may submit their comments electronically or in writing to the SEC. The SEC will review and use all comments received to communicate any changes to the proposed regulations.
The SEC Division on the Future of DeFi
in a dissenting opinion statementSEC Commissioner Hester Pearce has criticized the SEC’s proposed regulations, arguing that they embrace “stagnation, centralization, alienation, and extinction” rather than the promise of new technology.
Pierce argued that the proposed regulations would stifle innovation in the cryptocurrency market by forcing centralization and discouraging innovation. It also expressed concern that the regulations could prompt the expulsion of blockchain innovators as they seek more favorable regulatory environments outside the United States.
Peirce also criticizes the committee for rejecting the possibility of practical modifications to the registration framework, which would allow entrepreneurs to register more easily. Instead, Pierce argues, the commission is responding to good faith entrepreneurs with enforcement action, suggesting that the SEC is not supportive of innovation in the cryptocurrency market.
Pierce also criticizes the SEC’s “cavalier” approach to the proposed regulations, which she believes are markedly at odds with the agency’s approach a quarter-century ago. She notes that the SEC’s current approach is “not interested” in facilitating innovation and competition in financial markets, and instead seeks to protect “incumbents.” Commissioner Pierce concluded:
We extend the legal definition of “exchange” beyond reasonable reading to a poorly defined set of activities with no evidence that investors will benefit. We do so with a careless laugh of the consequences.
As the SEC considers public comment on the proposed regulations, the challenge for the committee will be to strike a balance between protecting investors and promoting innovation while addressing the concerns of dissenting voices like Commissioner Pierce.
Featured image from Unsplash, chart from TradingView.com
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