In a bit of a stealth rulemaking attempt, the Securities and Exchange Commission (SEC) has proposed new rules that would impact the definition of an exchange. The amendments regarding the definition would also impact Alternative Trading Systems (ATSs). As the SEC deems all digital assets to be securities, crypto would be included in these changes, inclusive of DeFi.
The proposal has opened up a firestorm of pushback from the digital asset sector, with comments objecting to the proposed amendments still rolling in.
In one sense, the proposal is emblematic of the shambolic approach by the current Commission, which has been criticized for its aggressive rulemaking – at times proposing overlapping rules that impact one another.
Coincenter, known for its astute criticism of crypto regulations, recently submitted a comment stating:
“…the proposed rule, as drafted, would not withstand constitutional scrutiny. Although there are many other likely legal defects with the proposed rule, including that it violates the First Amendment, exceeds statutory authority, and is arbitrary and capricious, this comment focuses on whether the proposed rule is insufficiently clear in its potential applicability as to render it unconstitutional under the Due Process Clause of the Fifth Amendment.”
Under the leadership of Chair Patrick McHenry, all Republicans on the House Financial Services Committee have joined in demanding the SEC rescind its proposed rulemaking regarding the definition of an exchange. The Republicans state that the amendments run contrary to the SEC’s mission while exceeding its authority.
To quote the letter sent to the Commission:
“Last year, the Committee on Financial Services sent a letter to Chair Gensler expressing our concern that the Commission’s attempt to expand the definition of an exchange to include ‘Communication Protocol Systems’ exceeded its statutory authority. With this re-opening, it is clear that the Committee’s initial concerns were valid. The Proposed Rule will stifle innovation and harm digital asset market participants and the U.S. economy more broadly. We urge you to withdraw this proposal as it would effectively shut down development of the digital asset ecosystem and continue to stagnate U.S. technological innovation.
The Proposed Rule significantly expands the definition of exchange in the Exchange Act to include systems that ‘bring […] together buyers and sellers of securities using trading interest’ and ‘make […] available [communication protocols] under which buyers and sellers can interact and agree to the terms of a trade.’ For digital assets, the Proposed Rule would go well beyond regulating centralized digital asset platforms and apply to persons acting ‘in concert’ with each other. This could capture a wide range of individuals in the digital asset ecosystem, including software developers and participants in a blockchain network’s consensus mechanism.”
The Members believe the SEC is front-running Congress by promulgating a rule to regulate digital assets just as the House is preparing legislation. At the same time, the Members believe that Gensler is pursuing his own personal views regarding digital assets without “adequate analysis or justification.”
The request is for the SEC to withdraw the proposal in light of the potential legislation.