The US SEC is getting ready to scrutinize DeFi markets even further

The U.S. Securities and Exchange Commission is set to remove any doubt that they plan to police decentralized finance. 

The commission is expected to declare on Friday that rules governing trading exchanges in the U.S. also apply to decentralized finance. The procedural move isn’t a change to rules, but rather an effort to make explicit whether existing exchange rules apply to decentralized finance.The proposed clarification and amendments to the definition of an exchange are subject to a vote by the Democratic majority commission that leads the agency, making them likely to pass. 

The action would formalize the SEC’s assertion of jurisdiction over activities labeled ‘decentralized’ that the agency sees as still falling under traditional definitions of securities trading. It may also signal increased scrutiny by the regulatory agency into that area of digital assets. So far the SEC has focused more on centralized crypto firms.

“Make no mistake: many crypto trading platforms already come under the current definition of an exchange and thus have an existing duty to comply with the securities laws,” SEC Chair Gary Gensler said in prepared remarks for Friday’s meeting. “Yet these platforms are acting as if they have a choice to comply with our laws. They don’t.”

DeFi ‘trading interest’

DeFi projects that bring together multiple buyers and sellers for the trading of assets, including non-firms and structured projects, could be considered securities exchanges by the SEC, and subject to civil charges if they fail to register as national securities exchanges or broker-dealers in the U.S. The exchange definition is tied to “trading interest,” according to SEC staff.

The move is meant to make clearer the SEC’s view of DeFi may imply that the agency is already investigating certain projects. The SEC does not comment on open investigations, and staff did not single out any particular project during a press call. The Commodity Futures Trading Commission, the other federal U.S. markets regulator, launched the first enforcement action against a decentralized autonomous organization, Ooki DAO, late last year, and the agencies have competing views on certain digital asset issues. The SEC has previously weighed in on the original DAO, but did not take an enforcement action against the project.

Decentralized finance isn’t the only market touched by Friday’s SEC action. The Democratic majority commission is expected to amend its rules related to U.S. Treasury and municipal bond markets.

But the SEC received a large amount of conflicting views on DeFi following a 2022 proposal to amend current exchange rules, which agency staff say prompted Friday’s meeting and explicit communication that DeFi projects could qualify as securities exchanges.

“In particular, the proposal would require communication protocols—venues that bring together buyers and sellers of securities through structured methods to negotiate a trade—to comply with rules for exchanges,” Gensler said in remarks prepared for Friday’s meeting. “As one example, request-for-quote platforms perform several exchange-like functions in the Treasury markets, among others. Ensuring that exchange-like platforms follow our exchange-specific rules benefits investors and markets alike.”

The move also allows the agency to release its own economic analysis of decentralized finance.

Gensler is scheduled to make an appearance before the House Financial Services Committee next week, and he and his agency face scrutiny from Congress over their handling of failed crypto firm FTX.

Disclaimer: The former CEO and majority shareholder of The Block has disclosed a series of loans from former FTX and Alameda founder Sam Bankman-Fried.

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