US SEC Considers Decentralized Crypto Platforms Exchanges and Seeks Public Input

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NEW YORK, April 14 (Reuters) – The U.S. Securities and Exchange Commission met on Friday to reopen public comment on its proposal to expand the definition of an “exchange”, saying its rules existing on exchanges also apply to decentralized cryptocurrency platforms.

The SEC voted 3-2 to seek additional public comment after crypto firms criticized the plan as being vague and aimed at engaging in decentralized financial platforms, also known as platforms. DeFi that would otherwise not be subject to the oversight of regulators.

DeFi platforms allow users to lend, borrow, and save in digital assets, bypassing traditional financial gatekeepers such as banks and exchanges.

The plan, first proposed in January 2022, would expand the definition of an exchange to include platforms that use “communication protocols” such as quote request systems. The change, if passed, is expected to grip many other regulatory venues beyond traditional exchanges that aggregate orders from multiple buyers and sellers in a market.

The proposal targeted Treasury markets and markets for other government securities, where inter-dealer cryptocurrency brokers operated as exchanges without registering them as such. But crypto firms pushed back on the plan amid growing tensions with the regulator. Many industry players have said that current securities regulations are inadequate and the industry needs new rules.

Some DeFi platforms may fall under the proposed definition, but others may already be considered exchanges by the existing one, SEC officials said this week.

Officials estimated that a dozen crypto firms would fall under the expanded definition, but declined to provide further details on the firms.

“Make no mistake: many crypto trading platforms already fall under the current definition of an exchange,” SEC Chairman Gary Gensler said in prepared remarks released Friday.

Most crypto trading platforms meet this definition whether they call themselves decentralized or not, Gensler said.

Friday’s public vote to reopen the comment period for 30 days was unusual.

Typically, the commission would decide behind the scenes whether an extension of a public comment period is necessary.

The meeting highlighted the ideological divide between the commissioners, with the two Republican commissioners dissenting.

The reopening “doubles down” on an initial proposal that would force centralization and undermine new technology, Republican Commissioner Hester Peirce said at the meeting.

“This commission is no longer concerned that regulatory stubbornness often produces absurd consequences,” she said. “To the contrary, today’s commission is aggressively expanding its regulatory reach to solve problems that don’t exist.”

While the crypto industry urged the SEC to clarify regulations, Friday’s ruling provided “very few answers” and likely raised additional questions for the industry, said Nicholas Losurdo, partner at Goodwin and former adviser to former SEC Commissioner Elad Roisman.

“They want to say, ‘Our existing rules work, all you have to do is fit in’, but they don’t in a lot of ways, and I think that’s another thing that the agency is grappling,” he said.

Reporting by Chris Prentice Additional reporting by Hannah Lang; Editing by Sharon Singleton

Our standards: The Thomson Reuters Trust Principles.

Hannah Lang

Thomson Reuters

Hannah Lang covers fintech and cryptocurrency, including the companies driving the industry and the political developments governing the sector. Hannah previously worked at American Banker where she covered banking regulation and the Federal Reserve. She graduated from the University of Maryland, College Park and lives in Washington, DC.

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