SEC Proposes Including Decentralized Exchanges under Existing Regulatory Framework

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The Securities and Exchange Commission (SEC) believes that decentralized finance (DeFi) and centralized finance (CeFi) platforms should be subject to the same regulations. However, this viewpoint has been met with strong opposition from one of the commissioners. 

Revisiting an Old Proposal to Regulate Digital Asset Trading

The SEC recently announced that it would reopen an earlier proposal surrounding consumer protection laws to include digital asset trading within its scope explicitly. According to a press release, the agency asserts that the rules governing securities exchanges should also apply to digital asset trading platforms and DeFi systems.

SEC Chair Gary Gensler stated that the supplemental release addresses comments from various market participants, particularly those in the crypto markets. The initial proposal in January 2022 sought to extend existing exchange laws to systems facilitating the trading of any type of security. These systems would be required to register as exchanges or broker-dealers and comply with regulations for Alternative Trading Systems.

The original proposal’s ambiguous language drew criticism from major crypto exchange Coinbase and crypto-supportive SEC Commissioner Hester Peirce. The proposed changes would now explicitly cover crypto asset trading and decentralized exchanges.

Gensler has consistently argued that most crypto assets fall under securities laws and that crypto exchanges should adhere to the same regulations as other trading platforms. Peirce, however, frequently criticizes Gensler’s efforts to fit the novel crypto industry into an existing ruleset.

Hester Peirce’s Critique of the Amendments

In a written response to Gensler, Peirce objected to the recent amendments, claiming that they promote stagnation, centralization, and hinder technological progress. She argued that the statutory definition of “exchange” was being stretched beyond reason to cover a poorly defined set of activities without any evidence that investors would benefit.

Peirce also contended that applying existing rules to DeFi would create confusing and unworkable standards for network participants, including miners and validators of blockchains supporting related protocols. She questioned the ability of DeFi participants to satisfy exchange or broker-dealer registration requirements and whether such registrations make sense for DeFi.

Peirce expressed her disappointment in the SEC’s approach, suggesting that the agency could have benefited from roundtable discussions involving stakeholders from different parts of the market. These roundtables could have helped the SEC better understand the issues and challenges surrounding DeFi regulation.

The Ongoing Debate on DeFi Regulation

As the SEC pushes to include decentralized exchanges in its regulatory framework, the debate over the appropriateness of applying traditional securities laws to this emerging industry continues. 

The SEC Chair believes that CeFi and DeFi platforms should be treated equally. However, Commissioner Peirce’s dissenting voice raises crucial questions about the practicality and impact of such regulations on innovation and the future of decentralized finance.

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