How the SEC’s “Dealer” Rule Changes Crypto Oversight

The revised Securities Exchange Act will require crypto investors who meet the “dealer” requirements to register with the Commission.

Gary Gensler sending electric shocks into a blockchain planet.
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  • The Securities and Exchange Commission has adopted a newly revised rule targeting strengthened oversight on the crypto industry.
  • The rule will impact select market participants and investors.
  • The SEC is renowned for its hostile regulatory stance against the crypto industry.

The United States cryptocurrency industry and the Securities and Exchange Commission have been on a years-long regulatory rift centered around the commission’s stringent stance on the asset class and efforts to label cryptocurrencies as securities subject to its oversight. 

Under the governance of Chair Gary Gensler, the SEC has adopted a “regulation by enforcement” approach to the industry, often accused of authority overreach and lack of clear regulatory standards. 

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Continuing its pursuit for oversight, the SEC has now voted in favor of a proposal seeking to broaden the scope of its “Dealer” rule and bring crypto-related transactions under its jurisdiction.

What Is the SEC’s Dealer Rule?

Initially proposed in 2022, the SEC “Dealer” Rule is a revision of the existing Securities Exchange Act of 1934, which regulates the U.S. financial markets. 

The SEC’s revision expands its authority on market activities that classify investors as “dealers” or “government securities dealers” and the criteria for what constitutes engaging in such activities “as a part of a regular business.”

Under this rule, market participants, including cryptocurrency investors, meeting the new definitions of dealers, are mandated to register with the SEC, join a self-regulatory organization, and adhere to the U.S. federal securities laws.

Backing the motion, SEC Chair Gensler emphasized the importance of ensuring consistency in regulatory standards for investor protection. 

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Gensler stated that the commission’s requirements are applicable to any one who “trades in a manner consistent with de facto market making,” absent of exception. 

How the SEC’s Dealer Rule Impacts Crypto

The SEC is renowned for its constant regulatory shake-ups, and its newly revised playbook edges it closer to the jurisdiction it has long pursued over crypto service providers and investors.

Empowered by its authority over “any person engaged in the business of buying and selling securities,” the SEC can reinforce its already stringent stance against the industry. 

This may entail imposing new capital requirements, mandating registration for activities, and demanding increased transaction reporting from more entities, such as high-speed traders, exchanges and hedge funds. 

Considering the implications of the new regulations on crypto traders, the question looms: Who qualifies as a dealer, and who does not?

Crypto Investors: Dealer or No Dealer?

The SEC has highlighted the criteria that qualify investors as “dealers,” “government securities dealers,” or those engaging in activities that are considered “as part of a regular business.”

Liquidity Providing Market Participants: According to the SEC Dealer rule, market participants engaging in crypto asset transactions that have the effect of providing significant liquidity to other investors are “dealers.”

Decentralized Finance (DeFi) traders and investors: Persons whose trading activities occur in the DeFi market also meet the definition of the commission’s “as part of a regular business” provision, are not exempt, and are mandated to register as a dealer or government securities dealer.

Distributed Ledger Technology-based protocols: The commission asserted that regardless of the initial opposition to applying the dealer rule to DeFi, “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.”

Authority Assertion: While some investors may not meet the specified criteria, this does not ensure their exemption. The SEC clarified that it maintains the authority to determine whether investors fall under its dealer requirements, even if those individuals do not meet the criteria specified.

Clarifications and Exemptions: There is an exception, however. Investors managing below $50 million in assets are spared from the SEC’s dealer rule and not required to register with the commission or comply with U.S federal securities laws.

On the Flipside

  • Investors have described the SEC’s dealer rule as wide-reaching and not reflective of a balanced decision-making process.
  • Commissioners Hester Peirce and Mark T. Uyeda have opposed the SEC “Dealer” crypto rule, asserting the revised rule extends beyond its statutory authority.
  • U.S. lawmakers have demanded the removal of SEC Chair Gary Gensler due to his persistent unfriendly actions against the cryptocurrency industry.

Why This Matters

The revision of the Securities Exchange Act of 1934 grants the Securities and Exchange Commission greater oversight and authority over the crypto industry and introduces changes to how the asset class is traded and regulated. 

South Korea cracks down on fraudulent crypto yield scheme, find out more:
Haru Invest CEO Arrested in South Korea for $828M Fraud
Read more about the SEC’s actions against crypto custody in traditional banking:
SEC, Gensler Face Criticism Over Crypto Custody Overstep

This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed as financial, legal, or tax advice. Trading forex, cryptocurrencies, and CFDs pose a considerable risk of loss.

Author
Grace Abidemi

Grace Abidemi, a cryptocurrency reporter at DailyCoin, covers industry developments and trends. She previously worked as a freelance writer. With a Bachelor's degree in German Language and certifications in marketing and storytelling, Grace creates engaging content. When not working, she's in Nigeria, mastering cooking and canvas painting, and enjoys learning about different cultures and languages.