Polygon Labs Voices Concerns Over SEC’s Proposed Definition of ‘Exchange’

• Polygon Labs argues SEC’s ‘exchange’ redefinition misfits decentralized blockchain operations.
• The proposal’s broad scope could inadvertently impact diverse blockchain-reliant industries.

Polygon Labs, a blockchain infrastructure behemoth, is sounding the alarm over the Securities and Exchange Commission’s (SEC) proposed redefinition of ‘exchange.’ The tech titan expressed these concerns in a June 13, 2023, letter requesting the SEC to reevaluate its proposed amendments to Rule 3b-16 under the Securities Exchange Act of 1934.

Blockchain Validators: Not Your Traditional ‘Group of Persons’

In the communication, Polygon Labs draws attention to the significant disconnect between the SEC’s proposed interpretation of ‘exchange’ and the reality of blockchain operations. Notably, the SEC’s suggestion that validators on a blockchain network—a host of independent, decentralized participants—should register as a ‘group of persons’ raises eyebrows.

On the other side, Polygon Labs argues that due to their decentralization and independence, these validators can’t coordinate as a traditional group. Moreover, the requirement for network operators to register is highlighted as a ‘critical flaw’ with profound implications. This could hinder technological innovation and economic growth in the U.S., an outcome that should be avoided.

Ambiguity and Misinterpretation: Two Troubling Aspects

Beyond this, the company raises questions about the unclear nature of the proposed “New Rule 3b-16(a) Systems.” Polygon Labs underscores that this ambiguity leaves several questions unanswered, including who the rule targets and whether compliance is feasible.

In addition, Polygon Labs points out the sweeping nature of the proposal, encompassing relationships far removed from traditional securities exchanges. The potential for misinterpretation here is vast, potentially causing more harm than good.

Unintended Consequences for Blockchain-based Technologies

The company ultimately cautions against the SEC’s proposal, expressing concern about its excessively broad scope and the potential for wide-ranging consequences. These unintended consequences could significantly impact diverse industries, especially those reliant on blockchain technologies like permissionless distributed ledgers and decentralized finance.

In conclusion, while it’s clear that regulatory frameworks need to adapt to new technological realities, this proposal, according to Polygon Labs, misses the mark. Consequently, the SEC must revise its proposal, balancing regulation and innovation.