Crypto Firms Hit SEC's Exchange Proposal

"WASHINGTON -- A Securities and Exchange Commission proposal intended to make Treasury markets more resilient has sparked a backlash from cryptocurrency companies, which say it could increase legal risks for decentralized finance, or DeFi, platforms.

The rule, proposed by the SEC in January, would expand the agency's definition of an exchange to include a broader array of communication systems that enable prospective buyers and sellers of securities to find each other. Such entities would have to register with the SEC either as exchanges akin to the New York Stock Exchange, or as a category of broker-dealers called alternative trading systems, or ATSs, which perform exchange-like functions but face lighter regulations.

An SEC-imposed deadline for public comment on the proposal ended last week. The agency's next step will be to analyze feedback from investors, companies and industry groups in the coming months before deciding whether to complete a rule.

Many of the proposal's loudest opponents are in the cryptocurrency industry, which isn't the rule's intended target. Companies including trading platform Coinbase Global Inc., venture-capital company Andreessen Horowitz, and stablecoin issuer Circle Internet Financial Inc., as well as several cryptocurrency-focused lobbying groups, warned that the plan would create more legal uncertainty.

The SEC's current definition of an exchange involves an entity that matches orders from multiple buyers and sellers, and "uses established, nondiscretionary methods" for determining how those orders interact with each other.

Under the proposal, the definition would replace the word "uses" with "makes available" to capture communication protocol systems that take a more passive role in enabling prospective traders to interact, negotiate and reach an agreement.

SEC officials say their goal is to bring oversight to messaging systems that professional traders use to obtain price quotes for Treasury bonds and other fixed-income securities.

These electronic platforms perform essentially the same function as exchanges but face little or no oversight from regulators. In 2019, the largest electronic trading platform for Treasurys, BrokerTec, suffered a roughly 90-minute outage on a Friday afternoon that could have shaken the broader market if it had occurred at a different time, the SEC noted.

"I think it's important that we consider revising the SEC's rules to reflect the increased use of electronic trading platforms in fixed-income markets," SEC chief Gary Gensler said in a speech Tuesday.

The agency's nearly 600-page proposal makes no mention of cryptocurrency. However, critics say its language could potentially capture DeFi platforms, which allow users to trade cryptocurrencies without a conventional intermediary." [1]

1. Crypto Firms Hit SEC's Exchange Proposal
Kiernan, Paul.
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 28 Apr 2022: B.1.