The SEC’s campaign to define ‘exchange’ should concern every American—even those without ties to crypto
The Securities and Exchange Commission has opened a new front in its campaign against cryptocurrency. In its latest maneuver, the agency is targeting the entire domestic decentralized finance industry by proposing a fundamental change to how it defines an “exchange.” If successful, the SEC could lead one of the most innovative sectors of finance — such as The Economist highlighted With the DeFi Wrap of 2021 – From American Shores.
The new legal fight over ‘exchanges’ is similar to the dispute over which crypto entities to consider.brokers,” the saga that united much of the industry in opposition in the summer of 2021.
Specifically, the wording of the recent proposed rules from the SEC seeks the amendment Current rules regarding alternative trading systemsor ATSs, to expand the definition of a securities “exchange” to bring in many participants in the digital asset industry who are not included. The new definition would include a group of people providing “communication protocol systems” that allow people to express interest in potential securities trading.
This raises the obvious question of what a “communication protocol system” is in the first place. But the proposed rule never defines the ambiguous term, instead asserting that a “group of persons” can exist when persons “act in harmony”—even by “informal” agreement—even if none of them individually or as a group, a practice Any “control” of the functions or facilities of the exchange. This comically broad interpretation means that even an unrelated group of individuals who have no actual involvement in the core functions of the exchange can be subject to securities regulation to operate the “exchange”.
This distorted definition of “exchange” would fundamentally change the traditional understanding of how we perceive one. It is akin to broadening the definition of a “baseball team” from the group of people directly associated with it—the players, possibly the manager, coaches, and front office staff—to a team in which the team’s cheerleaders and even outside sportscasters who perform certain “function(s)” associated with playing a game become Part of “The Team”. It’s doubtful anyone would consider a parking lot ticket-whacker to be part of the “team,” but in the new SEC’s view, it is possible depending on the “facts and circumstances.” It is easy to imagine other examples of how this language can be stretched to absurd degrees. Is the energy company that supplies electricity to the servers running the Communication Protocol System a partner in the exchange? And so on and so on.
The SEC’s exchange initiative is the agency’s latest and most outrageous attempt to expand its regulatory power beyond the power granted by Congress. For example, there is no law on the books at the moment that classifies digital assets as securities, and so the question remains open as to whether the agency has the authority to regulate digital assets. This rulemaking proposal offers a convenient final solution to this question, creating a new interpretation of “exchange” that gives the agency vast new scope to regulate a wide range of industry participants, beyond the legal limits set out in the Exchange Act. In fact, the Republicans are from the House Financial Services Committee Submit their own letter of payment The Securities and Exchange Commission to withdraw the proposal due to concerns about regulatory overreach.
You can prove it’s better to take on SEC Chairman Gary Gensler in his speech And giving the commission the benefit of the doubt that it seeks to create rules to “reflect…the changes…since Congress established the definition of reciprocity.” However, given that the agency’s proposal comes after a history of enforcement action and very little forward-looking guidance provided to the digital asset industry, Gensler deserves no doubt.
While there has been a lot of interest in the SEC’s recent enforcement actions, it’s important that the agency’s efforts to establish cryptocurrency rules — including its push to expand the agency’s powers — not go under the radar. Congress should closely monitor Gensler’s efforts and hold him accountable if they are not based on law and common sense.
By attempting to expand the SEC’s regulatory power and open a new front in his ongoing war against cryptocurrency, Gensler is exposing the agency to increased congressional scrutiny—exactly an opportunity for cryptocurrency advocates to make their strongest case. The definition of “exchange” may seem apt and technical, but the anti-technology and regulatory expansive impulse behind the proposal should concern every American — no matter how they feel about cryptocurrencies.
Amanda Tomminelli is the Chief Legal Officer for the Defi Education Fund, leading the organization’s impact and policy litigation efforts. The opinions expressed in Fortune.com articles. Comments are solely those of the authors and do not necessarily reflect the opinions or beliefs luck.
