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SEC Expands 'Dealer' Definition, Aiming at DeFi and Crypto Sectors

SEC's new dealer rule wasn’t met with understanding from the DeFi community

The U.S. Securities and Exchange Commission (SEC) approved a final rule on Tuesday, significantly broadening the definition of a dealer. This expansion could bring many within the financial and crypto sectors, particularly those involved in DeFi, under its regulatory purview. The SEC's decision to include crypto securities in this wider definition underscores a growing intent to regulate the digital assets market. According to the SEC,

 "The commission is not excluding any particular type of securities, including crypto asset securities, from the application of the final rules." 

This inclusion is part of a functional analysis focusing on securities trading activities rather than the type of security traded.

The expanded dealer definition: a closer look

The SEC's latest regulatory adjustment doesn't just redefine the scope of what constitutes a dealer; it also signals a more encompassing approach to oversight that includes, but is not limited to, operations dealing in cryptocurrency securities. SEC Chair Gary Gensler elaborated on the rule's implications, stating: 

"Absent an exemption or exception, if anyone trades in a manner consistent with de facto market making, it must register with us as a dealer – consistent with Congress’s intent.” 

This statement underlines the regulatory body's commitment to ensuring that entities engaged in market-making activities, irrespective of the asset class, adhere to established legal frameworks.

The rule itself, while primarily aimed at participants in the U.S. Treasuries market, casts a wider net that could entangle numerous businesses within the digital assets domain. Registration with the SEC now becomes a mandatory step, alongside adherence to securities laws and involvement in an industry-backed self-regulatory organization. This comprehensive requirement underscores the challenges many DeFi operations might face in aligning with the SEC's demands, particularly those that have traditionally operated with a degree of autonomy from conventional financial regulations.

How the crypto industry reacted to regulator’s initiative  

The crypto and DeFi communities have voiced strong opposition to the SEC's expanded dealer rule, highlighting concerns over its feasibility and the potential stifling of innovation. The DeFi Education Fund, in particular, criticized the rule as "misguided and unworkable," lamenting the SEC's failure to address the industry's substantive concerns. 

The organization stated, emphasizing the challenges DeFi entities face in meeting the SEC's new requirements.

"The SEC not only failed to confront the substance of our concerns but also failed altogether to articulate any discernible path to compliance for DeFi market participants,"

SEC Commissioners Mark Uyeda and Hester Peirce also expressed dissent, pointing out the rule's broader implications for market regulation and its potential to add regulatory confusion. Uyeda highlighted the problematic nature of the rule's broad application, stating:

 "Under the Commission’s approach, any person can be a 'dealer' if they buy and sell securities as part of a regular business." 

Peirce, known for advocating crypto-friendly regulations, criticized the rule for its lack of practical consideration for the crypto markets.

As the digital assets industry grapples with these new regulations set to take effect in April of the next year, the path forward remains uncertain. The SEC's stance has sparked a debate on the balance between innovation and regulation.

Crypto regulatory uncertainties: expert insights

Shapiro delved into the specifics of whether liquidity providers managing assets over $50 million are classified as securities dealers. Shapiro clarified that not all liquidity providers fall under this category; the classification hinges on the nature of the tokens within the pool and whether transactions conducted are considered securities trades. He highlighted the ongoing legal debates surrounding the classification of tokens traded on secondary markets, as seen in cases involving Coinbase and Kraken, where the categorization of tokens is under scrutiny.

Bill Hughes, the senior counsel and director of global regulatory affairs at Consensys, emphasized the critical need for definitive and actionable clarity on which crypto assets are deemed securities by U.S. law. Hughes pointed out that the recent regulatory amendments targeting crypto are likely to be contested in federal court due to their significant impact on the securities landscape. He expressed concern over the SEC's reluctance to provide needed clarity, noting: 

"You can expect many parties from various sectors to seek judicial review. The SEC's track record in such cases has been lacking. It's surprising that the SEC seems disinterested in providing this clarity. Currently, the public's immediate hope for resolution lies with Congressional intervention."

Hughes's remarks reflect broader industry frustration with the SEC's approach to crypto regulation. Legal challenges from Ripple, Grayscale, and Coinbase highlight the resistance faced by the SEC's regulatory measures. The crypto community and industry stakeholders continue to criticize the SEC for its hesitation to clarify regulations, despite longstanding requests from both the community and policymakers. There's a consensus among experts that the latest regulatory focus on liquidity providers will also be scrutinized through judicial review.