US SEC views decentralized crypto platforms as exchanges, seeks public input

NEW YORK, April 14 (Reuters) – The U.S. Securities and Exchange Commission met on Friday to reopen public comment on its proposal to expand the definition of an “exchange,” clarifying that its existing rules on exchanges also applies to decentralized cryptocurrency platforms.

The SEC voted 3-2 to accept further comments from the public after crypto firms criticized the plan as vague and aimed at embedding decentralized finance platforms, also known as DeFi platforms, that would otherwise not be subject to the regulator’s oversight.

DeFi platforms allow users to lend, borrow and save in digital assets, bypassing the traditional gatekeepers of finance such as banks and exchanges.

The plan, first proposed in January 2022, would expand the definition of an exchange to include platforms that use “communication protocols” such as request-for-offer systems. The amendment, if passed, is expected to capture many more arenas for regulation beyond traditional exchanges that aggregate orders from multiple buyers and sellers in one marketplace.

The proposal targeted treasury markets and marketplaces for other government securities, where inter-dealer crypto brokers have operated as exchanges without registering as such. But crypto firms pushed back on the plan amid growing tensions with the regulator. Many in the industry have said that existing securities regulations are inappropriate and that the sector needs new rules.

Some DeFi platforms may fall under the proposed definition, but others may already be considered exchanges of the existing one, SEC officials said this week.

The officials estimated that about a dozen crypto firms would fall under the expanded definition, but declined to provide any more details on which firms.

“Make no mistake: many crypto trading platforms are already covered by the current definition of an exchange,” SEC Chairman Gary Gensler said in prepared remarks published Friday.

Most crypto trading platforms meet that definition, regardless of whether they call themselves decentralized, Gensler said.

Friday’s public vote to reopen the 30-day comment period was unusual.

Usually, the commission will decide behind the scenes whether it is necessary to extend a public comment period.

The meeting underscored the ideological divide between the commissioners, with both Republican commissioners at odds.

The reopening is “doubling down” on an initial proposal that would force centralization and undermine new technology, Republican Commissioner Hester Peirce said at the meeting.

“This commission no longer worries that regulatory bullheadness often produces absurd consequences,” she said. “Rather, today’s commission is aggressively expanding its regulatory reach to solve problems that don’t exist.”

While the crypto industry has called on the SEC to provide regulatory clarity, Friday’s move provided “very few answers” and likely raised more questions for the sector, said Nicholas Losurdo, a partner at Goodwin and former adviser to former SEC Commissioner Elad Roisman.

“They want to say, ‘Our existing rules work, all you have to do is fit into them,’ but they don’t in a lot of ways, and I think that’s another thing that the agency is struggling with,” he said.

Reporting by Chris Prentice Additional reporting by Hannah Lang; Editing by Sharon Singleton

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