The Securities and Exchange Commission has adopted rules requiring market participants who play a key role in providing liquidity to comply with federal securities laws, including virtual currencies.
The SEC voted 3-2 to adopt the rulemaking at Tuesday's meeting, and the proposed 194-page format included one reference to cryptocurrencies in a footnote. The 247-page rule adopted Tuesday applies to people trading cryptoassets that meet the definition of securities or government securities, except those with assets of less than $50 million. According to the rules adopted, the rules will have an impact on decentralized finance.
“If an individual’s trading activities in cryptoassets, including products, structures, and activities involved in the so-called DeFi market, meet the definition of ‘as part of the ordinary course of business’ set out in the final rule (i.e., the individual’s ) engages in a regular buying and selling pattern of crypto-asset securities that has the effect of providing liquidity to other market participants, as described in the Qualitative Criteria, and no exceptions or exclusions apply; A person must register as a dealer or a government securities dealer.
After the rulemaking was first proposed in March 2022, the crypto industry pushed back against the rule in a comment letter to the SEC. Some commenters said this rule is unreasonable because DeFi products have no central governing body and are just software.
In a comment letter, the DeFi Education Fund delves into the role of automated market makers, calling it an “execution protocol.” According to the fund, automated market makers (AMMs) implement liquidity pools of cryptocurrencies and other digital assets and lock them into smart contracts to facilitate trading.
Industry reaction
The DeFi Education Fund criticized the rulemaking adopted Tuesday as “misguided and unworkable.”
“While the SEC acknowledged that it had received comments discussing DeFi, including our concerns, the SEC not only failed to address the nature of our concerns, but also failed to address compliance issues for DeFi market participants. “We were never able to articulate a clear path forward,” the CEO said. Miller Whitehouse Levin said in an emailed statement. “IImposing obligations on entities within the DeFi ecosystem that they cannot comply with is wrong, unrealistic, and hostile to innovation. ”
Cody Carbone, vice president of policy at the Digital Chamber of Commerce, said of Tuesday’s vote, “It’s another example of the SEC’s continued hostility to the digital asset industry. ”
“We are abandoning decades of precedent for imposing impossible rules on digital asset market participants and are requiring additional market participants to register as dealers,” Carbone said in a statement. “Because the 200-page proposed rule only mentioned digital assets in a footnote, the SEC did not want to seek the digital asset industry’s perspective on the rule, despite its impact.”
Mr. M said the crypto industry sought to address the SEC's concerns by updating the definition of a dealer.Alisa Koppel, legal director of the Blockchain Association, said in a statement.
“Unfortunately, the final rule does little to constructively address industry concerns and overturns the established framework in favor of an amorphous focus on whether a person acts as a ‘de facto’ market maker.” It is entrenching rules that are impossible to overturn,” Koppel said. “The revised definition of ‘dealer’ imposes impossible requirements on DeFi projects, provides no clarity for market participants, and could lead to a chilling of innovation across the digital asset ecosystem.”
Rebellion from Secretary Peirce
Republican Commissioner Hester Peirce, who voted against the rule, objected to some aspects of the rule at Tuesday's meeting.
“While this release does not spend a lot of time on cryptocurrencies, it does explain that automated market makers may have to register as dealers under the final rule,” Peirce said. “My understanding is that AMM is just a software protocol, but how do you register as a dealer?”
SEC officials responded to Peirce by saying AMM is more than software.
After some back and forth, Peirce asked how many people providing liquidity to AMM pools would be looped into this rule.
“Unfortunately, we don't have great data because this market is neither transparent nor compliant,” the SEC official said.
“So I think one of the reasons they don't comply is because they can't understand what our rules are, and they can't even understand when we consider it to be a security.” Perth he answered.
SEC Chairman Gary Gensler noted the $50 million exception cap and said there is demand in both crypto and non-crypto areas.
Gensler earlier said in his opening statement that the overall rules are needed to protect investors, noting that markets are evolving to become faster with the advent of electronic and algorithmic trading. He said the companies act as “de facto market makers” and do not register with the SEC as dealers, which would require them to report data or keep books and records.
“To me, these measures are just common sense,” Gensler said.
“Congress did not intend for registration and regulatory requirements to apply to some dealers and not others in a manner consistent with de facto market making, absent an exemption or exception. If you want to trade, you have to register as a dealer. This is consistent with the intent of Congress, but also a kind of competitive aspect, to make Congress fair and equal. “There are,” Gensler added.
The final rule becomes effective 60 days after publication in the Federal Register. The compliance date will be one year after the effective date of the final rule.
Updated with comment on February 7th at 1:15 p.m.
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