As was noted last week, this past January the Securities and Exchange Commission (SEC) proposed amendments to the Exchange Act and the definition of an Exchange as well as Regulation ATS (Alternative Trading System). While described in relatively benign terms, the language of the proposed changes may impact digital asset markets – perhaps dramatically.
CI reported on a comment letter posted by a group of very high-profile blockchain advocates aiming to preserve digital asset innovation in the US. You may read that here.
Below are some additional comments submitted by interested parties which may be impacted by what the SEC intends to accomplish.
Circle Internet Financial, a top stablecoin issuer that is pursuing a national bank charter, said there are “valid concerns” regarding the vague language, undefined terms and potential broad reach of the proposed rule changes:
“As Commissioner Peirce has urged, the Commission should think through the full implications of its proposals, particularly with respect to digital asset markets, and should welcome more extensive public comment from such market participants prior to implementing new regulation in this space.”
Circle added that like other market participants, it wants well-regulated digital asset markets as well as transparency. Circle asked the Commission to engage more directly with the industry.
Andreessen Horowitz (a16z), one of the best-known VCs in the world who is active in the crypto sector, said the proposal may have “significant and adverse consequences” for Web3 and DeFi in general. a16z suggested that:
“…the Commission should repropose the rule and address the deficiencies identified here before promulgating a regulation that risks imposing unprecedented and unworkable burdens on DeFi systems.”
Noting that the proposal does not mention digital assets by name, even though the proposal is full of inferences impacting crypto, the VC states:
“Because the Proposal risks imposing substantial burdens on DeFi systems without analyzing their practical and economic implications, we respectfully request that the Commission revise its proposed rule to clarify that DeFi systems are not in its scope, or alternatively, repropose the rule with a cost-benefit analysis expressly evaluating its effects on DeFi systems. Any proposed rule that intends to regulate DeFi systems should be tailored to the opportunities and risks presented by truly decentralized systems. Accordingly,rather than extend the requirements of exchange or broker-dealer registration to the broad universe of Communication Protocol Systems, the Commission should consider more targeted regulation of the traditional, centralized systems that truly operate as securities exchanges.”
The law firm of Linklaters, active in the crypto sector, said they appreciate the importance of investor protection, but the proposals expansion of what constitutes an exchange it would be difficult to advise such clients as to how to comply under the proposed amended rule.
“We fully appreciate the gravity and importance of protecting investors, and the rapid advancement in technology and the proliferation of many new types of digital assets and activities that, in the Commission’s view, are likely to constitute securities or transactions in securities. Nevertheless, we believe that the proposed amendments, in the current, broad form, are likely to lead to significant market and legal uncertainty. While we understand the potential challenges in doing so, we would greatly appreciate any efforts by the Commission to develop a more clearly articulated standard addressing whether and, if so, when technologies of the types described in this letter are intended by the Commission to be deemed to be exchanges or mechanisms of exchanges, in order to enable securities lawyers to provide clear guidance to their clients.”
The Blockchain Association, an advocacy group promoting policy that embraces digital asset innovation, called the proposal “improperly vague” adding that DeFi is never mentioned in the proposal yet that appears to be part of what the SEC is targeting in the proposal.
“In fact, decentralized finance and other digital asset protocols are not mentioned once in the 650-page Proposal. This omission is significant: the Proposal notes that “certain restructuring costs, such as costs associated with making changes to business practices to comply with the broker-dealer registration requirements, could be significant,” but dismisses this cost by noting that only “6 non-broker dealer operated Communication Protocol Systems without a broker-dealer affiliate could be required to restructure their business in order to comply with the broker-dealer registration requirements.” We therefore respectfully request that the SEC clarify that it intends the Proposal to cover only the 14 entities identified therein.”
David Burton, an expert in securities law and advocate for small businesses and beneficial innovation at the Heritage Foundation, describes the proposal as “Commission overreach” and “a solution in search of a problem.”
“The proposed rule is designed to address a “problem” that the economic analysis in the proposing release does not even begin to establish actually exists. In the relevant analysis of the “benefits” of the rule, all a reader will find is a bald assertion that, notwithstanding higher costs and adverse effects on competition, “improved regulatory oversight” will have benefits that exceed the costs. It does, however, contain the admission that “the Commission is unable to quantify these benefits to market participants because the Commission lacks data on the amount of information that is currently available to different market participants …” The manifest deficiencies in the economic analysis may also cause the Commission problems when the rule is subject to judicial review. The Commission needs to slow down, seriously seek input from market participants and other analysts and modify the proposed rule so that it does not do serious damage to capital markets.”
While the digital asset sector of Fintech desires bright-line rules and workable regulation, it appears that the proposal by the SEC is a ham-fisted attempt to undermine this type of innovation. The question remains as to whether, or not, the SEC will listen to the concerns of digital asset innovators, or simply use the comment letters as window dressing to pursue a political goal.