On Thursday, SEC Chair Gary Gensler gave a speech where he reinforced the importance of a rulemaking proposal to alter the definition of an exchange—though what he left unsaid was that this change would give the SEC purview over both centralized crypto exchanges as well as DeFi.
During his remarks at the 10th Annual U.S. Treasury Market Conference, Gensler highlighted the modernization and ‘electronification’ of exchanges as why an amendment to the definition in what is known as ‘Rule 3b-16’ is necessary.
“The Commission’s proposal, if adopted, would require registration of certain trading platforms in the Treasury markets,” he said. “It would bring Treasury trading platforms with significant volume under Regulation Systems Compliance and Integrity, a rule that protects for the resiliency of technology infrastructure. It also would require these platforms to comply with the Fair Access Rule, which provides for fair access to platforms and would prohibit platforms from making unfair denials or limitations of access. This update would close a regulatory gap among platforms.”
What Gensler didn’t mention was how the proposed rule alters the definition in a way that would capture centralized crypto asset exchanges such as Coinbase as well as decentralized finance (DeFi) exchanges.
Read more: Gensler Grilled in Congressional Hearing Over SEC’s Approach to Regulating Crypto
In the original rulemaking from 2022, the change in definition that the crypto industry responded to was described as ”communication protocols.” The new proposed rule stated, “The Commission is proposing to amend Rule 3b-16(a)(2) to add ‘communication protocols’ as an established method that an organization, association, or group of persons can provide to bring together buyers and sellers of securities.” The concept of communication protocols is what drew concern among the crypto industry as to whether the new definition of exchange could mean all centralized exchanges and perhaps all DeFi protocols may have to register with the SEC.
Then, in 2023, the SEC made clear the proposed definition of an exchange and reiterated “the applicability of existing rules to platforms that trade crypto asset securities, including so-called ‘DeFi’ systems.”
Paul Grewal, Chief Legal Officer (CLO) of Coinbase, has been bringing up this particular rulemaking in court to argue that the SEC’s approach to providing regulations for the crypto industry is inefficient.
In August, Grewal stated on X, “At the very least, it should be withdrawn and rewritten. The SEC failed to collect basic information and conduct any economic analysis about how the proposal would affect DEXs. Yet it pushed forward anyway with its irrational assumptions.”
Read more: Why the Investigation Into Gary Gensler’s Hiring Practices Is Unlikely to Result in Any Action
SEC Commissioner Mark Uyeda, said of this rule in 2023, “The potential unintended consequences of the expansionary and ambiguous language of the proposed amendments to Rule 3b-16 are concerning.” Uyeda also argued there was not enough examination of how this rule might impact the crypto markets either.
Gensler has not yet initiated any additional studies or requests for comments to explore these unintended consequences, while these latest remarks signal his intent to follow through on the rule change in spite of any potential adverse effects to DeFi.
