The Securities and Exchange Commission has voted to adopt rules requiring market participants with a key liquidity-providing role to comply with federal securities laws, with cryptocurrency in the mix.
The SEC voted 3-2 to adopt these regulations at a meeting on Tuesday, which in its proposed 194-page format included one mention of crypto in a footnote. The 247-page rule adopted Tuesday will apply to people transacting in crypto assets that meet the definition of securities or government securities, excluding assets of less than $50 million. According to the adopted rule, the rules would affect decentralized finance.
“If an individual’s trading activities in crypto assets, including products, structures and activities involved in the so-called DeFi market, meet the definition of ‘as part of a regular business’ as set out in the final rules (i.e. say, the person engages in a regular pattern of buying and selling crypto assets, thereby providing liquidity to other market participants, as stated in the qualitative standard), and no exception or exclusion applies, that person would be obliged are required to register as a dealer or government securities dealer,” the rule said.
The crypto industry pushed back on the rule in comment letters to the SEC after the regulations were first proposed in March 2022. Some commenters said the rule was unreasonable for DeFi products because they have no central control and are just software.
The DeFi Education Fund delved into the role of automated market makers in its comment letter, calling it an “execution protocol.” Automated market makers, or AMMs, implement a liquidity pool of crypto and other digital assets and lock them into a smart contract that then facilitates trading, the fund said.
Industry response
The DeFi Education Fund on Tuesday called the adopted regulations “misguided and unworkable.”
“While the SEC acknowledged that it had received comments about DeFi, including our concerns, the SEC not only failed to address the substance of our concerns, but also completely failed to provide a discernible path to formulate compliance for DeFi market participants,” said CEO Miller Whitehouse-Levine said in an emailed statement. “IImposing obligations on entities in the DeFi ecosystem that cannot be met is wrong, impractical and hostile to innovation.”
Cody Carbone, vice president of policy for the Chamber of Digital Commerce, called Tuesday’s vote “another example of the SEC’s continued hostility toward the digital asset industry.”
“We are asking additional market participants to register as dealers, abandoning decades of precedent to apply impossible rules to participants in the digital asset market,” Carbone said in a statement. “The SEC did not want to know the digital asset industry’s perspective on this rule, despite its impact, as the 200-page proposed rule only mentioned digital assets in a footnote.”
Backlash from Commissioner Peirce
Republican Commissioner Hester Peirce, who voted against the rule, opposed some aspects of the rule during Tuesday’s meeting.
“The release doesn’t spend much time talking about crypto, but it does explain that an automated market maker may be required to register as a dealer under the final rules,” Peirce said. “An AMM, as I understand it, is just a software protocol, so how does it register as a dealer?”
An SEC official, responding to Peirce, said an AMM is more than just software.
After some back and forth, Peirce then asked how many people who put liquidity into AMM pools would be linked to the rule.
“This is a market that is not transparent or compliant, so we don’t really have good data unfortunately,” the SEC official said.
“I mean, I think one of the reasons why they don’t follow the rules is because they can’t figure out what our rules are and they can’t even figure out when we think something is a certainty,” said Peirce in response.
SEC Chairman Gary Gensler noted the $50 million exception limit and said there is demand in both the crypto and non-crypto space.
Earlier, Gensler said in his opening statements that the rule as a whole is needed to protect investors and noted that markets have evolved to become faster with the advent of electronification and algorithmic trading. He said companies act as “de facto market makers” and have not registered as dealers with the SEC, which would require them to report data and keep books and records.
“These measures are just common sense to me,” Gensler said.
“Congress did not intend for registration and regulatory requirements to apply to some dealers and not others. If there is no exemption or exception, someone who acts in a manner consistent with de facto market making must register as a dealer – that is consistent with the intent of Congress, but also a kind of competitive nature, makes it fair and equal ” added Gensler.
The final rules will become effective 60 days after publication in the Federal Register. The date of compliance will be one year after the effective date of the final rules.
