SEC Expands Definition For ‘Securities Dealer’ To Include DeFi Market Makers

The United States Securities and Exchange Commission is ramping up its attack on DeFi, with the regulator broadening its definition for financial “dealers” to encompass large DeFi liquidity providers.

On Feb. 6, the SEC passed two new rules expanding the definition of a financial securities dealer with three votes in favor versus two votes against. The new rules expand the definition of “regular business” activities to classify all liquidity providers commanding at least $50M worth of assets deemed to comprise securities as “dealers,” including entities operating on decentralized crypto exchanges.

“The commission is not excluding any particular type of securities, including crypto asset securities, from the application of the final rules,” the SEC said. “If anyone trades in a manner consistent with de facto market making, [they] must register with us as a dealer.”

The SEC now defines a digital asset dealer as a person engaged in “a regular pattern of buying and selling crypto asset securities that has the effect of providing liquidity to other market participants.” However, liquidity providers commanding less than $50M in assets are exempt from the rule.

The new guidelines will take effect 60 days after being published to the Federal Registrar, with market participants required to comply with the rule one year after that date — likely April 2025. The changes were opposed by commissioners Hester Peirce and Mark Uyeda, but found support from commissioners Gary Gensler, Caroline Crenshaw, and Jaime Lizarraga.

The rule was first proposed in March 2022 and primarily sought to target digital U.S. Treasuries markets. However, a footnote in the original proposal also took aim at participants in the digital asset markets.

“Digital asset securities”

The new dealer definitions have attracted pushback from cryptocurrency proponents, including the dissenting SEC commissioners.

Commissioner Mark Uyeda emphasized the lack of regulatory clarity concerning the criteria that would categorize a digital asset as a security.

“Importantly, the federal securities laws only apply when the instrument at issue is a security; therefore, providing clarity on the jurisdictional status is imperative,” Uyeda said. “For years, market participants have expressed concern about a lack of regulatory guidance in the crypto space… It’s unfortunate that, despite the large number of rule proposals issued by the SEC during the last two years, cryptocurrency was not among them.”

“The rule reflects little thought regarding its practical application in the crypto markets,” scorned Commissioner Hester Peirce. “Not only do the tired questions about when a crypto asset is a security remain, but the rule raises new questions about how the rule will apply in the context of automated market makers.”

In a comment submitted to the SEC, the DeFi Education Fund, a web3 advocacy organization, similarly criticized the SEC’s proposal for failing “to give any consideration to [the] market structure for digital asset securities.”