Two recent, highly technical proposals could solidify the Securities and Exchange Commission’s (SEC) grasp of the U.S. crypto market, leading the industry to take another stand against what it sees as the wrong approach to government oversight.
Gary Gensler keeps arguing much of the crypto world should fall within reach of the Securities and Exchange Commission (SEC) as the top cop for the U.S. securities markets. But lobbyists and lawyers for digital assets firms and their trade groups are building their opposition to a February proposal they believe may expand how the SEC defines regulated exchanges in such a way that it encompasses a wide swath of crypto platforms. And while they were gearing up for the bureaucratic battle over that one, the SEC sprang another proposal that seems to follow the same pattern: potential oversight of the industry without making that intention explicitly clear.
For the initial rule proposal, which would reset the SEC’s regulations for so-called alternative trading systems and expand the definition for what makes an exchange, the agency set a brief, 30-day window that closes Monday. The industry’s growing Washington contingent is arguing that this policy would be a harmful overreach into the interactions between people rather than just their transactions and – as it stands – it’s too opaque for crypto businesses to know where they may run afoul of the agency.
“We think that there’s a potential threat to the industry if this rule were enacted,” said Sarah Milby, a senior policy manager for the Blockchain Association in Washington, arguing the proposal is bad policy that crypto firms see as a “backdoor route to regulation.” She said the agency should be “more forthright” in the rules it’s developing.
The SEC did not respond to a request for comment.
“The central question this proposal raises 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 matters at ConsenSys, who also criticized the way the agency seems to be approaching the industry.
Hughes helped draft ConsenSys’s comment letter on the proposal, which was published Monday.
“There is no mention of crypto, blockchain or DeFi in the 654 pages of the rule, but whether this proposal applies to crypto is very much an open question given how broadly it is written,” Hughes said. “That sort of transparency is precisely what the federal rulemaking procedures are intended to provide.”
‘Retail investors’
However, in his own recent remarks, Gensler suggested that alternative trading platforms are more typically used by institutional investors, not the little guys more common to crypto trading. He said he told his staff to weigh whether investor protections “on exchanges with which retail investors interact should apply to crypto platforms.”
That’s signaling he’s thinking of crypto platforms as national securities exchanges, according to a recent note from law firm Sidley Austin.
Whatever category the SEC eventually decides is right for digital assets shops, Gensler again suggested it’s almost certain his agency will have a say, because, “with so many tokens trading, the probability is quite remote that any given platform has zero securities.”
The more recent rule, proposed March 28, would redefine what it means to be a securities dealer, including people and businesses using automated and algorithmic technology to execute trades. Unlike the first proposal, this one did nod toward the industry once, saying in its 36th footnote that, yes, the agency had its eye on “any digital asset that is a security.”
“This follows very quickly on the heels of the ATS rule,” Milby said, which she argued makes it seem as if “the SEC is hastily trying to make regulations without fully understanding the effects and costs of those potential rules.”
Hughes said he expects the industry will take the agency to court if a final version of the exchanges rule looks much the same as the proposal. Legal challenges have sometimes been successful in reversing policy efforts from the securities watchdog.
“These rule changes have the potential to capture a vast array of new technologies, and the persons who develop and advance those technologies,” said Michelle Bond, the chief executive officer for the Association for Digital Asset Markets in Washington. “This has the potential to chill further development in the United States of digital asset technologies.”
Key Republican lawmakers have joined in similar criticism of the rules.
«The rulemakings fail to define the SEC’s statutory authority,» Rep. Patrick McHenry – the ranking Republican on the House Financial Services Committee – and fellow GOP Rep. Bill Huizenga wrote in a letter to the agency. They also argued that the regulator «fails to identify the problem that the rulemakings are intended to solve, particularly as it relates to requiring certain market participants facilitating digital asset transactions to register with the SEC.»
