- The SEC has expanded its definition of a dealer.
- While the rule change primarily seeks to bring certain bond market participants under the agency’s purview, it also targets DeFi.
- Like other SEC attempts to assert jurisdiction over crypto, detractors have stressed a need for more clarity.
In recent years, the Gary Gensler-led U.S. SEC has maintained that the crypto market should be under its purview. The agency has spared no tool in its arsenal to enforce this stance, proposing rule changes and launching enforcement actions.
While the focus has often been on the SEC’s lawsuits against crypto exchanges and classification of crypto assets, the agency’s latest action could see it cast its regulatory net over DeFi. As has often been the case, the agency’s move has received backlash from crypto proponents who continue to stress the perceived lack of a clear path to compliance.
SEC’s Expanded Dealer Rule: A Threat to DeFi?
On Tuesday, February 6, SEC commissioners voted 3-2 to expand the agency’s definition of a dealer to include proprietary traders like hedge funds, which it believes have become critical sources of market liquidity and should become subject to the same oversight as regulated dealers.
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Per the expanded rule, the SEC would require any person or entity that controls over $50 million in capital and engages in trading activity that frequently provides liquidity to register as a dealer.
While the SEC states that the primary aim of the rule change is to fix liquidity issues in the U.S. Treasury market, the agency has stressed that the rules would apply to all securities markets, including what it describes as crypto asset securities.
In line with this reasoning, the SEC further stressed that DeFi was not outside the scope of the rule change.
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"There is nothing about the technology used, including distributed ledger technology based protocols using smart contracts, that would preclude crypto asset securities activities from falling within the scope of dealer activity. Accordingly, certain persons engaging in crypto asset securities transactions may be operating as dealers as defined under the Exchange Act," the SEC argued.
Despite these sentiments, for many crypto proponents, the new rule, which could force DeFi liquidity providers to register with the SEC, blurs the line between traders and dealers and poses the same hurdle as most of the agency’s other efforts to regulate crypto.
Lack of Clarity
As highlighted by SEC Commissioner Hester Peirce, who joined Mike Uyeda to oppose the rule change, how the SEC classifies crypto asset securities remains unclear to most industry participants.
"One of the reasons they're not compliant is they can’t figure out what our rules are. They can’t even figure out when we think that something is a security," Peirce contended.
Crypto advocacy groups like the DeFi Education Fund supported Peirce’s view. The group reiterated a stance it had shared in a May 2022 letter asserting that the SEC had offered too little guidance to crypto proceed with the rule change.
"Market participants do not know the net capital treatment of digital assets. There is no guidance regarding how permissibly to keep records of digital assets. Guidance regarding custody of digital assets has raised more questions than answers. There would be no practical way for a broker-dealer to create order tickets for transactions with, or deliver trade confirmations to, pseudonymous counterparties transacting with it through a liquidity pool."
Concerns over a lack of clarity have been at the center of many of the SEC’s crypto enforcement lawsuits. In April 2023, Coinbase dragged the agency to court to compel an answer to a petition for rulemaking to provide clarity to the crypto industry. In December 2023, the SEC responded by denying the petition.
On the Flipside
- The recently approved rule change will not go into full effect until April 2025, potentially providing a window for DeFi participants in the U.S. to come to terms with the full implications.
- ConsenSys lawyer Bill Hughes suggests that the rule change could also impact international market makers, providing liquidity to DeFi projects that onboard U.S. citizens.
Why This Matters
The recent SEC rule change looks set to complicate how liquidity is provided to DeFi projects in the U.S.
Read this for more on the tensions between the crypto industry and the U.S. SEC:
SEC, Gensler Face Criticism Over Crypto Custody Overstep
Learn about the latest decentralized social media craze:
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