The Securities and Exchange Commission (SEC) voted to adopt rules that would require market participants with a significant liquidity provider role to comply with federal securities laws.
The SEC voted 3-2 to adopt the rulemaking at its meeting Tuesday, and the proposed 194-page form included one mention of cryptocurrencies in a footnote. The 247-page rule adopted Tuesday applies to those trading cryptocurrency assets that meet the definition of securities or government securities, unless they have less than $50 million in assets. According to the rules adopted, these will have implications for decentralized finance.
“If an individual’s trading activities in crypto-asset securities, including products, structures, and activities related to the so-called DeFi market, meet the definition of ‘as part of the regular business’ set forth in the final rule (i.e., if the individual meets the applicable individual qualitative criteria), If a person engages in a pattern of regular buying and selling of crypto-asset securities that has the effect of providing liquidity to other market participants, as specified, and no exceptions or exclusions apply, that person must register as a dealer or government securities broker’; there is.
The cryptocurrency industry sent a comment letter to the SEC to withdraw the rule after it was first proposed in March 2022. Some commentators said this rule is unreasonable for DeFi products because there is no central controlling authority and they are just software.
In a comment letter, the DeFi Education Fund took a closer look at the role of automated market makers, calling them “execution protocols.” Automated market makers (AMMs) facilitate trading by implementing liquidity pools of cryptocurrencies and other digital assets and locking them into smart contracts, according to the fund.
Industry response
The DeFi Education Fund called the rulemaking adopted Tuesday “wrong and unworkable.”
“While the SEC has acknowledged that it has received comments on DeFi, including our concerns, the SEC has not only failed to confront the nature of our concerns, but has also failed to articulate a discernible compliance path for DeFi market participants.” Miller Whitehouse-Levine said in an emailed statement. “me“Imposing obligations that the DeFi ecosystem cannot comply with is wrong, impractical, and hostile to innovation.”
Cody Carbone, vice president of policy at the Digital Chamber of Commerce, called Tuesday’s vote “a“It’s another example of the SEC’s continued hostility toward the digital asset industry.”
“We are abandoning decades of precedent that imposed impossible rules on digital asset market participants and asking additional market participants to register as dealers,” Carbone said in a statement. “The SEC did not want the digital asset industry’s perspective on this rule despite its impact because the 200-page proposed rule only mentioned digital assets in the footnotes.”
Commissioner Peirce’s Rebuttal
Chairwoman Hester Pierce, a Republican who voted against the rule, pushed back against some aspects of the rule during Tuesday’s meeting.
“This release doesn’t spend a lot of time talking about cryptocurrencies, but it does explain that automated market makers may be required to register as dealers under the final rule,” Peirce said. “As far as I know, AMM is just a software protocol. How do I register as a dealer?”
SEC officials said of Peirce that AMM is more than software.
After some back and forth, Peirce asked how many people posting liquidity to AMM pools were covered by the rules.
“This market unfortunately does not have great data because it is not transparent or compliant,” an SEC official said.
“I mean, I think one of the reasons they’re not compliant is because they can’t figure out what our rules are and they can’t even figure out when we think something is secure,” Peirce said.
SEC Chairman Gary Gensler cited the $50 million exception cap and said there is demand in both the crypto and non-crypto space.
In his opening statement earlier, Gensler said a full set of rules were needed to protect investors, noting that markets have evolved faster with the advent of electronics and algorithmic trading. He said the companies are acting as “de facto market makers” and are required to report data and keep books and records because they do not register with the SEC as dealers.
“To me, these measures are just common sense,” Gensler said.
“Congress did not intend the registration and regulatory requirements to apply to some dealers and not others. Absent an exemption or exception, anyone must register as a dealer if he or she is transacting in a manner consistent with market making in effect. Congress intended and makes it competitively fair and equitable,” Gensler added.
The final rule will become effective 60 days after publication in the Federal Register. The compliance date is one year after the effective date of the final rule.
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