SEC approves rule to protect bond investors – but critics say DeFi will pay the price – DL News

• SEC commissioners voted 3-2 to adopt a rule expanding the definition of a broker-dealer.
• Critics say the rule, if enforced, could see AMM liquidity providers fall under SEC regulation.
• “One of the reasons they don’t comply is because they can’t understand what our rules are,” spokeswoman Hester Peirce said.

The Securities and Exchange Commission has voted to adopt a rule that would bring more hedge funds and market makers under its regulatory umbrella.

This rule is primarily intended to make the U.S. Treasury market safer and more resilient.

In crypto circles, the rule sparked howls of protest.

Indeed, the rule, if enforced, will require certain DeFi market participants to register with the SEC, bringing traders who provide liquidity to automated market makers into the SEC’s regulatory mandate.

“This regulation targets proprietary trading funds, private funds and others that make money by buying low and selling high in the Treasury market, while creating additional regulatory confusion on other markets, including crypto asset securities,” said Republican Commissioner Mark Uyeda, who joined Hester. Peirce rejected the rule, said at an SEC meeting Tuesday.

“This action looks like another salvo in the commission’s ongoing war against private funds.”

Uyeda and Peirce were outvoted by Chairman Gary Gensler and Democratic commissioners Caroline Crenshaw and Jaime Lizarraga.

Definition of dealer

As technology advances, major liquidity providers, such as hedge funds, are emerging in financial markets like U.S. Treasuries.

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Many of them are unregulated and this rule – proposed in 2022 – aims to allay the SEC’s concerns about the increasing automation of the markets.

The rule expands the legal definition of the term “broker” to include securities trading companies. It encompasses hedge funds, market makers and fast trading firms that meet the new definition standards and control more than $50 million in assets.

What does this have to do with cryptography?

The rule encompasses brokers trading all securities, and Gensler has made it clear that he considers the vast majority of crypto tokens to be securities.

Many funds have expanded their portfolios to include crypto assets, and they would now have to register with the SEC – a registration that comes with a heavy compliance burden.

No clarity

Advocates like the DeFi Education Fund and the Blockchain Association fought back against the rules.

They said the SEC had not provided sufficient guidance on the treatment of cryptocurrencies under securities laws and that the SEC was overstepping its authority in trying to regulate crypto.

“The breadth and ambiguity of the proposal’s qualitative standards would raise many questions about the status of investors who use AMMs, other DeFi protocols, and other all-to-all execution protocols,” wrote Miller Whitehouse Levine, CEO of the DeFi Education Fund. letter.

At Tuesday’s meeting, Peirce asked SEC staff how an AMM — which she said is just a software protocol — could even register as a dealer.

Haoxiang Zhu, director of the SEC’s Trading and Markets Division, responded that staff distinguished between front-end software and people using the protocols to trade and create digital asset markets.

“In this sense, crypto is nothing special. This is analogous to a regular broker making the market, posting a bid and an offer using software. We are not trying to capture the technology, but rather the people who use it for commercial purposes,” he said.

When Peirce asked Zhu how many businesses would be affected by the rules, he responded – echoing statements Gensler did – it was difficult to say because DeFi is an opaque and non-compliant industry.

Peirce responded: “One of the reasons they don’t comply is because they can’t understand what our rules are. They can’t even understand when we think something is safe.

She said that unless the SEC can provide some clarity, implementing these rules for DeFi would be a challenge for both the regulator and the industry.

Contact the author at joanna@dlnews.com.

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