SEC Re-Opens Comments on Proposed Rule that May Upend Definition of an Exchange, Could Crush DeFi

The Securities and Exchange Commission (SEC) re-opened comments on a proposed rule during a meeting of the Commission that in many respects raised more questions than provided answers.

The proposed amendments to the definition of “exchange” under Exchange Act Rule 3b-16 were initially proposed in January 2022 and reopened the comment period in May 2022. The reopened comment period closed on June 13, 2022.

The proposed rule reiterated that it would impact digital assets or “crypto asset securities” and the platforms or services that provide trading in these assets. This includes DeFi.

SEC Chair Gary Gensler commented on the extended comment period:

“I believe this supplemental release will help address comments on the proposal from various market participants, particularly those in the crypto markets. Make no mistake: many crypto trading platforms already come under the current definition of an exchange and thus have an existing duty to comply with the securities laws. Investors in the crypto markets must receive the same time-tested protections that the securities laws provide in all other markets. I welcome additional public comment on all aspects of the proposal in light of the information in this supplemental release.”

Previous comments have brought to the forefront the difficulties of applying the proposed rules for crypto platforms and services. As Chair Gensler has frequently stated that all digital assets are securities; if approved, the new rules could undermine the US crypto sector. While Gensler has called for crypto exchanges to come in and register, participants have stated this is not a possibility as the SEC ignores their requests. And who do you regulate in a DeFi transaction?

The proposed Amendments to the Exchange Act Rule 13b-14 Regarding the Definition of an Exchange is available here.

The SEC has also published a “fact sheet” on the proposal.

The comment period will last for 30 days after the proposal is published in the Federal Register.

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