Gensler’s Exchange Rule Proposal Raises DeFi and Crypto Concerns

Important Insights

Gensler urges the need for revised exchange regulations to encompass emerging digital asset platforms.
There are concerns in the crypto sector that the SEC’s new rules may impose excessive compliance burdens on DeFi platforms.

During his speech at the US Treasury Market Conference today, SEC Chairman Gary Gensler reiterated the necessity of updating the definitions of “exchange” and alternative trading systems (ATS).

This proposal has attracted considerable attention in the crypto and DeFi sectors. Gensler’s comments mainly focused on enhancing the efficiency and resilience of the US Treasury market, yet the ramifications for digital assets are unmistakable.

Gensler underscored the importance of revising the exchange definition to represent the advancements of trading platforms, especially given the increasing prevalence of algorithmic and high-frequency trading techniques within markets, including those for digital assets.

The SEC’s proposal, first put forward in 2022, extends registration mandates to platforms acting as market makers for government securities. However, it’s the potential ripple effect on digital asset platforms that has sparked concerns.

Participants in the crypto industry have criticized the proposal for its expansive language, fearing it could compel decentralized finance platforms and digital asset exchanges to adhere to regulations originally crafted for traditional markets.

While Gensler did not specifically reference DeFi in his address, the language of the 2022 proposal could broaden the SEC’s jurisdiction over DeFi platforms, requiring them to register as exchanges or ATS.

Gensler’s determination to regulate these platforms has raised alarms among crypto proponents, who contend that decentralized platforms are fundamentally distinct from centralized exchanges and thus should not be bound by the same regulations.

Prometheum and tZero, two platforms that are registered as alternative trading systems, are among the first to obtain special purpose broker-dealer status for digital asset securities. These platforms are already adapting to the evolving regulatory framework by complying with SEC guidelines.

As the SEC continues to advocate for regulatory revisions, the crypto sector will be keeping a close eye on how these developments unfold. Currently, the proposed rules are still under examination, but the consequences for digital assets and decentralized platforms are anticipated to be extensive.