Apr 21, 2022 - Economy & Business

Crypto industry takes on SEC's proposed new "exchange" definition

Illustration of the eagle on the Securities and Exchange Commission seal with shrugging arms.

Photo Illustration: Megan Robinson/Axios. Photo: Andrew Harrer/Bloomberg via Getty Images

Monday was an important deadline in Washington for the crypto industry: comments on a U.S. Securities and Exchange Commission proposal to expand the definition of "exchange" were due. In short: it's getting a big thumbs down.

Why it matters: The crypto industry is mostly worried that the definition would become too broad and vague and could easily encompass — or at least create uncertainty for — decentralized finance (DeFi) protocols and other participants that should not be regulated as such.

The big picture: Earlier this year, the SEC proposed changes to a number of laws — namely, Rule 3b-16 of the Securities Exchange Act, Regulation ATS, and Regulation SCI — that would put more so-called "alternative trading systems" under its purview as exchanges.

  • The proposal builds on another one the agency put forth in 2020 on many of the same topics.

Flashback: The industry faced similar frustrations last year when the infrastructure bill broadened the definition of a "broker," potentially lumping in a bevy of industry participants such as miners and software developers.

What they're saying: "[T]he Proposed Rule’s expansion of the definition of 'exchange' to encompass communication protocols is exceedingly broad, reaching beyond the limits of the statutory definition established by the Exchange Act," Coinbase chief legal officer Paul Grewal writes in a comment letter, questioning the agency's legal authority to make such a move.

Between the lines: The new definition would go beyond entities that bring together trade orders using specific tools, to include those merely bringing together any buyers and sellers and making those tools available.

  • "The SEC does not have the authority to expand its interpretation of the term 'exchange' to include merely adjacent or proximate activities," write attorneys Gus Coldebella and Gregory Xethalis.
  • Many also point out that the proposal does not once mention digital assets or decentralized finance, leaving a big question mark as to whether the agency intends for it to apply to the asset class at all (and how).
  • Several also slammed the SEC for not properly engaging with stakeholders regarding these proposed changes, and imposing undue compliance burdens on entities that are left in a gray area.

The other side: "Over the decades since Congress put in place the definition of an exchange, there have been many changes to platforms — in particular, that they are increasingly electronified," SEC chairman Gary Gensler said in a statement. "I think it’s important that we revise the SEC’s rules to reflect those changes."

What we're watching: What the SEC does next given the concerted pushback from the crypto industry.

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