U.S. SEC sees decentralized crypto platforms as exchanges, seeks public input

By Chris Prentice and Hannah Lang

NEW YORK (Reuters) -The U.S. Securities and Exchange Commission met on Friday to open public comment again on its proposal to expand the definition of an “exchange,” clarifying that its existing rules on exchanges also apply to decentralized cryptocurrency platforms.

The SEC voted 3-2 to take additional comments from the public after crypto firms criticized the plan as vague and aimed at roping in decentralized finance platforms, also known as DeFi platforms that would otherwise not be subject to the regulator’s oversight.

DeFi-platforms allow users to lend, borrow and save in digital assets, bypassing the traditional gatekeepers of finance such as banks and exchanges.

The plan, first proposed in January 2022, would expand the definition of an exchange to include platforms that use “communication protocols” such as request-for-quote systems. The change, if adopted, is expected to capture many more venues for regulation beyond traditional exchanges that bring together orders from multiple buyers and sellers in a marketplace.

The proposal was aimed at Treasury markets and marketplaces for other government securities, where inter-dealer crypto brokers have functioned like exchanges without registering them as such. But crypto firms pushed back on the plan amid growing tensions with the regulator. Many in the industry have said existing securities regulations are inappropriate and the sector needs fresh rules.

Some DeFi platforms may fall under the proposed definition, but others may already be considered exchanges by the existing one, SEC officials said this week.

The officials estimated about dozen crypto firms would fall under the expanded definition, but declined to provide any more specifics about which firms.

“Make no mistake: many crypto trading platforms already come under the current definition of an exchange,” SEC Chair Gary Gensler said in prepared remarks published on Friday.

Most crypto trading platforms meet that definition, regardless of whether they call themselves decentralized, Gensler said.

Friday’s public vote to reopen the comment period for 30 days was unusual.

Typically, the commission would decide behind-the-scenes if extending a public comment period is necessary.

The meeting underscored the ideological divide among the commissioners, with both Republican commissioners dissenting.

The reopening “doubles down” on an initial proposal that would force centralization and undercut new technologies, Republican Commissioner Hester Peirce said at the meeting.

“No longer does this commission worry that regulatory bullheadedness often produces absurd consequences,” she said. “Rather, today’s commission aggressively expands its regulatory reach to solve problems that do not exist.”

While the crypto industry has urged the SEC to provide regulatory clarity, Friday’s move provided “very few answers” and likely raised additional questions for the sector, said Nicholas Losurdo, a partner at Goodwin and previously counsel to former SEC Commissioner Elad Roisman.

“They want to say, ‘Our existing rules work, all you need to do is fit within them,’ but they don’t in many ways, and I think that’s another thing that the agency is grappling with,” he said.

(Reporting by Chris Prentice; Additional reporting by Hannah Lang; Editing by Sharon Singleton and Aurora Ellis)