Two recent, highly technical proposals may strengthen the Securities and Exchange Commission’s (SEC) grip on the US crypto market, prodding the industry to take yet another stance against what it realizes as the wrong approach to government oversight.
Because of its role as the top cop for the US securities markets, SEC Chairman Gary Gensler has argued that the SEC should be the lead regulator of the crypto world. However, lobbyists and lawyers for digital asset firms and trade groups are opposed to a February proposal that they believe would broaden the SEC’s definition of “regulated exchanges” to include a wide range of crypto platforms. Meanwhile, the SEC announced another proposal that appears to follow the same pattern: potential oversight of the crypto industry without explicitly stating that intention.
The SEC set a brief 30-day window that closes Monday for the initial rule proposal, which would reset the SEC’s regulations for so-called alternative trading systems and expand the definition of what constitutes an exchange. The crypto industry’s growing Washington, D.C., contingent is arguing that this February policy would be a harmful overreach into people’s interactions rather than just their transactions and that it’s too opaque for crypto businesses to know where they might run afoul of the agency as it stands.
We believe there is a potential threat to the industry if this rule is enacted, said Sarah Milby, senior policy manager at the Blockchain Association in Washington, arguing that the proposal is bad policy that crypto firms see as a “backdoor route to regulation.” She believes the agency should be “more forthright” in developing rules.
The SEC did not acknowledge a comment request.
The central question raised by this proposal is whether the SEC can and should regulate platforms where buyers and sellers only talk about trading, said Bill Hughes, senior counsel and director of global regulatory affairs at ConsenSys, who also criticized the SEC’s approach to the industry.
Hughes assisted in the creation of ConsenSys’ proposal comment letter, which was published on Monday.
There is no mention of crypto, blockchain, or [decentralized finance] in the 654 pages of the rule, Hughes said, but whether this proposal applies to crypto is very much an open question given how broadly it is written. That kind of transparency is exactly what the federal rule-making procedures are supposed to provide.
Retail investors
However, Gensler recently stated that alternative trading platforms are more commonly used by institutional investors, rather than the individuals who are more likely to be involved in crypto trading. Gensler stated that he directed his staff to consider whether investor protections on exchanges with which retail investors interact should be extended to crypto platforms.
According to a recent note from law firm Sidley Austin, this indicates he views crypto platforms as national securities exchanges.
Whatever category the SEC eventually decides is best for digital asset firms, Gensler believes his agency will have a say because, with so many tokens trading, the probability of any given platform having zero securities is quite remote.
The second, more recent rule, proposed on March 28, would redefine what it means to be a securities dealer, including individuals and businesses that use automated and algorithmic trading technology. Unlike the first proposal, this one made a passing reference to the industry, stating in its 36th footnote that the SEC was interested in “any digital asset that is a security.”
This comes on the heels of the [alternative trading systems] rule, Milby said, making it appear as if “the SEC is hastily trying to make regulations without fully understanding the effects and costs of those potential rules.”
Bill Hughes predicted that the industry would sue the agency if the final version of the exchange’s rule resembled the proposal. Legal challenges have sometimes been successful in reversing the securities watchdog’s policy efforts.
These rule changes have the potential to capture a vast array of new technologies, as well as the people who develop and advance those technologies, said Michelle Bond, CEO of the Association for Digital Asset Markets in Washington. This has the potential to stifle further development of digital asset technologies in the United States.
The proposed rules have also been criticized by key Republican lawmakers.
The rulemakings fail to define the SEC’s statutory authority, wrote Reps. Patrick McHenry of North Carolina, the House Financial Services Committee’s ranking Republican, and Bill Huizenga (R-Mich.) to the SEC. They contended that the SEC fails to identify the problem that the rulemakings are intended to solve, particularly concerning requiring certain market participants facilitating digital asset transactions to register with the SEC.
