All Trading Platforms Subject To Securities Laws

SEC is targeting DeFi as the battleground of technology and regulation.

Gary Gensler’s hardline stance against cryptocurrencies is not something new. Last week, the U.S. Securities and Exchange Commission (SEC) reopened the comment period for public input on proposed amendments to the definition of an exchange.

More Trouble for Cryptos

The SEC’s revisiting of the exchange definition aimed at including DeFi in its definition of the securities exchange. The proposal is part of a more extensive effort to formalize the regulatory framework for the cryptocurrency industry.

There are several important considerations to bear in mind concerning decentralized finance (DeFi). DeFi operates on smart contracts and follows a permissionless model, wherein participants can engage without requiring approval from a centralized entity.

Additionally, the proposed amendments by the SEC pertain exclusively to centralized exchanges, which are subject to regulatory oversight. With this stance, there may be even more issues coming for the DeFi space.

DeFi may fall within the definition of an exchange, which raises significant questions about its regulatory classification and potential implications for future regulation.

The SEC Wants More Power

The agency is known for being proactive in its regulatory oversight of the cryptocurrency industry. The SEC has been closely monitoring the emerging field and its impact on the financial markets in recent years.

The crypto industry has long been seeking regulatory clarity from the SEC to navigate the complex landscape of cryptocurrencies and avoid regulatory pitfalls. However, recent developments indicate that the agency is unlikely to provide tailored regulations.

Instead of creating new regulations for the crypto industry, the SEC is focusing on targeted adjustments to its existing securities regulations to ensure that crypto is held to the same standards as other financial assets.

The proposal faces strong opposition from several regulators.

SEC Commissioner Hester Peirce has raised concerns about applying existing regulations to DeFi platforms. She stressed in a separate statement that Gensler’s move “sends a message that we are uninterested in facilitating innovation and competition in the financial markets and instead seek to protect incumbents.”

Commissioner Peirce, a vocal advocate for innovation in the crypto industry, expressed worries that imposing traditional regulations on DeFi could result in confusing and unworkable standards for network participants, including blockchain miners and validators.

She also questioned whether DeFi participants would be able to meet the registration criteria of exchanges or broker-dealers and whether such registrations were necessary for the unique nature of DeFi.

This contrasts with SEC Chairman Gary Gensler’s long-standing argument that most crypto assets should be subject to securities laws and that cryptocurrency exchanges should adhere to the same regulations as traditional trading platforms.

Potential Impacts

The proposed amendments have raised concerns among the decentralized finance (DeFi) community. If implemented, these amendments could have significant implications for DeFi platforms.

One potential impact is the requirement for DeFi platforms to register with the SEC. Currently, DeFi operates in a permissionless and decentralized manner without the need for approval from a central authority.

However, the proposed amendments could change this landscape, mandating DeFi platforms to register with the SEC as traditional exchanges, subjecting them to regulatory oversight.

Under the proposed amendments, compliance with investor protection laws could also be required for DeFi platforms. This could entail additional compliance measures, such as Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations, to protect investors and prevent financial crimes.

Moreover, the proposed amendments may also impose reporting requirements on DeFi platforms. This could include regular financial reporting, disclosures of risks, and other information that would be required by the SEC.

Such reporting obligations could add administrative burdens to DeFi platforms, potentially impacting operational efficiency and cost structure.