Continuing its offensive against the cryptocurrency ecosystem, the SEC has reopened the debate on whether to apply the same requirements to decentralized exchanges (DEX) as for centralized platforms. However, disagreements have been expressed internally.
DEX are in the SEC’s sights
Last week, we raised questions about whether decentralized finance (DeFi) could become the next target of US regulators. As if to echo this, the Securities and Exchange Commission (SEC) has reopened a comment period to address the case of decentralized exchanges (DEX).
To be more precise, it would amend the definition of exchange in Rule 3b-16 of the Securities Exchange Act of 1934, so as to include DEXs in this regulatory spectrum. A first comment period had already been opened on this subject last January:
“The Commission received numerous comment letters on the January 2022 proposal that, among other things, requested information on the application of the existing rules and the application of the proposed amendments to systems that trade in crypto-asset securities and meet the proposed definition of trading or exchange systems that use distributed ledger or blockchain technology, including…systems qualified as decentralized finance…. “
While nothing has been acted upon as of yet, if such a scenario were to come to fruition, it would only increase the legal limbo of the United States. In an extreme case, any DeFi protocol could then be accused of marketing unregistered tracks under the pretext that Americans can access them. This could lead to applications blocking access to these users, as some launchpads already do to cover their asses.
Despite everything, it seems that these discussions are not unanimous within the SEC. Indeed, Commissioner Hester Peirce has for example clearly indicated her disagreement to Gary Gensler:
Rather than embracing the promise of new technology as we have in the past, we propose here to embrace stagnation, force centralization, encourage expatriation and welcome the extinction of new technology. Accordingly, I disagree. “
Further on in his speech, we can even guess a reference to the recent threats sent to Coinbase. Indeed, Hester Peirce says that when entrepreneurs try to discuss with the SEC the best way to adapt the legal framework so that they are in compliance, the institution “instead rewards their good faith with enforcement action.”
Paul Grewal, Coinbase’s chief compliance officer, praised the commissioner’s words on Twitter:
In just 60-something words, SEC Commissioner @HesterPeirce has managed to articulate all that hits awfully close to home. Thank you. pic.twitter.com/8mZxkg16rH
– paulgrewal.eth (@iampaulgrewal) April 15, 2023
For his part, Warren Davidson, the representative of Ohio’s 8th district in the U.S. Congress, responded that he would introduce a bill “to correct a long line of abuses.
The purpose of such a bill would be to remove Gary Gensler from office, replacing the role of SEC chairman with that of a director dependent on the commissioners:
To correct a long series of abuses, I am introducing legislation that removes the Chairman of the Securities and Exchange Commission and replaces the role with an Executive Director that reports to the Board (where authority resides). Former Chairs of the SEC are ineligible. https://t.co/VBnkgt8bhM
– Warren Davidson (@WarrenDavidson) April 16, 2023
While all of this remains a matter of debate, these events only serve to accentuate the regulatory battle that has been waged in the U.S. since the beginning of the year