Gensler’s exchange rule proposal sparks concerns for DeFi and crypto platforms

In his address today at the US Treasury Market Conference, SEC Chair Gary Gensler reiterated the importance of regulatory changes to the definition of “exchange” and alternative trading systems (ATS). 

This proposal has garnered significant attention within the crypto and DeFi spaces. While Gensler’s remarks largely centered around improving the efficiency and resilience of the US Treasury market, the implications for digital assets are hard to ignore.

Gensler emphasized the need to update the exchange definition to reflect the evolution of trading platforms, particularly as algorithmic and high-frequency trading strategies have become more prominent in markets, including those handling digital assets. 

The SEC’s proposal, first introduced in 2022, extends registration requirements to platforms acting as market makers for government securities. However, it’s the potential spillover effect on digital asset platforms that has raised concerns.

Crypto industry participants have criticized the proposal for its broad wording, fearing it could force decentralized finance platforms and digital asset exchanges to comply with regulations initially designed for traditional markets. 

Although Gensler did not directly mention DeFi in his speech, the 2022 proposal includes language that could extend the SEC’s jurisdiction over DeFi platforms, requiring them to register as exchanges or ATS. 

Gensler’s push to regulate these platforms has prompted concerns from crypto advocates, who argue that decentralized platforms are inherently different from centralized exchanges and should not be subject to the same rules.

Prometheum and tZero, two platforms registered as alternative trading systems, are among the first to receive special purpose broker-dealer status for digital asset securities. These platforms are already navigating the shifting regulatory landscape by complying with SEC requirements. 

As the SEC continues to push for regulatory updates, the crypto industry will be closely watching how these changes unfold. For now, the proposed rules remain under review, but the implications for digital assets and decentralized platforms are likely to be far-reaching.