Photo Illustration: Megan Robinson/Axios. Photo: Andrew Harrer/Bloomberg via Getty Images
While centralized crypto exchanges fight for survival with the SEC, the regulator is closing in on re-defining the definition of "exchange" more broadly.
Why it matters: The amendment would have big implications for the crypto industry, but it’s also drawing criticism from traditional finance shops who fear what else may end up getting caught in its wake.
Driving the news: Yesterday was the deadline in the reopened comment period on the SEC's proposed change to a rule made under the Securities Exchange Act, widening the definition of an exchange to include a broader scope of trading platforms.
- The regulator first proposed changes in January 2022, but sought comments following its reopened release in April — and there are many of them.
Zoom in: The proposed rule amendment would bring what the SEC calls "communications protocol systems" (CPS) within the definition, sweeping DeFi, or decentralized finance protocols, under the regulator's authority.
- What would qualify as an exchange under the proposed amendment would be platforms that (1) bring together buyers and sellers of securities using trading interest and (2) make available methods where buyers and sellers can interact and agree to terms.
The big picture: That is just one among some two dozen rules the SEC plans to finalize this year — part of the 2023 agenda that chair Gary Gensler said "taken together" would advance the agency's "three-part mission: to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation."
- Zoom in: That first part — "to protect investors" — underlies the proposed changes. And it is a message that is landing with some folks.
What they're saying: Financial industry nonprofit Better Markets said in its comment letter that "more cryptocurrency platforms within the scope of the securities laws governing exchanges" would provide "important protections" against the fraud and crime commonplace in crypto.
- It argues that decentralization is an "illusion," citing a report from prominent security firm Trail of Bits.
The intrigue: Some traditional finance shops aren't pleased about the change, primarily concerned with what platforms or services might fall under the CPS umbrella.
- Market-making firm Virtu Financial said it thought the commission had "thoughtfully considered" the first set of comments from the original proposal, but that the re-release not only "fail(s) to address the defects in the original" but also "compounds them and makes them worse."
The intrigue: Some Wall Street heavyweights would appear to have thoughts too, though, we don't really know what.
- BlackRock met with folks from the Office of the Chair on May 24, regarding the definition of "exchange" and "how to understand the term negotiation protocol system," according to a memo.
- JPMorgan Chase and Fidelity Investments have had talks with the SEC too.
Zoom out: Crypto firms are also pushing back, saying the proposed change is unclear or "unconstitutionally vague," per Bill Hughes, senior counsel at ConsenSys, in a near-50 page comment letter.
- There's "no way for market participants to know whether their actions contribute to the efforts of potential buyers and sellers to transact, or to contemplate a possible future transaction," Hughes said.
- He added: Proceeding with the rule could cost at least several million dollars in costs annually, per the SEC, but the benefits aren't laid out.
What we're watching: How the SEC responds to those comments as they move toward finalizing the change.
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June 15, 2023 at 10:57AM
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SEC proposal to re-define "exchange" draws broad industry concerns - Axios
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