SEC's Attempt to Redefine 'Exchange' Could Impact Crypto Industry.
June 20, 2023:- The Securities and Exchange Commission (SEC) is again taking action against the crypto industry. This time, they focus on decentralized finance (DeFi) by proposing a significant change in defining an “exchange.” If successful, this move could force the innovative DeFi sector out of the United States, as highlighted by The Economist in 2021.
This new battle over the definition of “exchanges” is similar to the previous debate about determining “brokers” in the crypto industry, which faced opposition from many players in 2021.
The SEC’s proposed rule seeks to modify existing regulations regarding Alternative Trading Systems (ATSs) to broaden the definition of a securities “exchange” and include more participants from the digital asset industry who were previously not included. The expanded definition would encompass individuals or groups that provide “communication protocol systems” enabling people to express interest in potentially trading securities.
This raises the question of what qualifies as a “communication protocol system.” However, the proposed rule needs to provide a clear definition. Instead, it suggests that a “group of persons” can be considered an exchange even if they “act in concert” through an “informal” agreement without exercising any control over the exchange’s operations. This overly broad interpretation means that even individuals unrelated to an exchange’s core functions could be subject to securities regulations for operating an “exchange.”
This expansive definition of an “exchange” would change how we traditionally understand it. It’s like expanding the definition of a “baseball team” to include players, coaches, staff, fans, and sportscasters who play specific roles associated with the game. While it may be hard to consider a ticket scalper in the parking lot as part of the team, the SEC’s new perspective opens up that possibility depending on the circumstances. This vague language could lead to absurd scenarios, such as questioning whether a power company supplying electricity to servers used by a “communication protocol system” should be considered an exchange partner.
The SEC’s push to redefine exchanges reflects its ongoing attempt to expand its regulatory power beyond what Congress has authorized. Currently, no law is classifying digital assets as securities, leaving the authority to regulate them in question. This proposed rule circumvents that issue, allowing the SEC to control a wide range of industry participants beyond the limits established by the Exchange Act.
Concerns about regulatory overreach prompted Republicans from the House Financial Services Committee to request the withdrawal of the proposal.
While some argue that we should trust SEC Chair Gary Gensler’s intentions to align with changes since Congress established the exchange definition, his history of enforcement actions and lack of guidance to the digital asset industry doubt his credibility.
It’s crucial to pay attention to the SEC’s recent enforcement actions and its rulemaking efforts regarding crypto. The expansion of the agency’s powers should not go unnoticed. Congress must closely monitor Gensler’s actions and hold him accountable if they exceed legal boundaries or common sense.
Gensler invites increased scrutiny from Congress by attempting to broaden the SEC’s regulatory authority and continuing the war against crypto. This provides an opportunity for crypto advocates to present their strongest arguments. Although the “exchange” definition may seem technical and niche, the proposal’s anti-tech inclination and regulatory overreach should concern all Americans, regardless of their stance on crypto.
