The U.S. Securities and Exchange Commission may be targeting decentralized finance, as it has reopened an old proposal that was made last year. This would target platforms that facilitate crypto transactions and regulate them as exchanges.

In January 2022 , the SEC proposed to expand the definition of “exchanges”, in order to include a wider range of trading activities in the U.S. The agency stated that some entities engaged in trading were not regulated by the SEC as exchanges. This created a “regulatory imbalance.”

The Securities Agency read the comments letters last year from the crypto industry, which called the initial proposal a power grab overreaching and lacking enough clarity to be legit. The divided commission voted Friday 3-2 to approve what is essentially a response. The revised proposal uses a more direct language to include DeFi as part of the broader definition of regulated markets. It also details the estimated costs that this change will cost the industry.

Specific changes will be announced on Friday.

Gary Gensler, SEC chair, believes that the majority of crypto platforms already operate as unregistered security exchanges. This is true even if the latest changes to the definition are made. According to a SEC factsheet outlining the changes, Gensler and the SEC are ready to “reiterate that existing rules apply to platforms that trade cryptocurrency asset securities, including the so-called “DeFi” systems.”

In the meeting on Friday, he stated that “calling yourself a DeFi Platform is not an excuse for defying securities laws.”

SEC officials told reporters before the meeting that the SEC reopened the meeting and provided additional information after market participants requested more information on the proposed amendments, including how they would apply to crypto assets and DeFi.

According to SEC officials the agency doesn’t intend to define DeFi within the rule. Instead, it will assess each case based on how the activity has been handled, such as whether an intermediary exists and what services that intermediary provides. The two commissioners who opposed the proposed changes were primarily critical of the lack of clear examples and definitions in the proposal. Hester Peirce, and Mark Uyeda.

Peirce said that the new text “doubles up on defects” of the original and “articulates confused and unworkable standard.” She noted that the crypto industry was destroyed last year, and that it “seems perverse that we would encourage centralization.”

Peirce said, “We should have started from the beginning and released a concept announcement.” She asked SEC staff a series of detailed questions about how the exchange definition could work. The staff repeatedly told her that they would need to consider the questions and come back with more information.

Uyeda, who criticized the proposal for its “expansionary language and ambiguity”, noted that the SEC seems to answer many key questions from those that could be regulated with: “It Depends.”

Gensler reaffirmed his belief that “the majority of crypto-tokens are securities”, and that existing requirements for security exchanges already apply to crypto trading platforms.

He said: “These platforms match the orders of multiple buyers of crypto securities with sellers using established, nondiscretionary methods.” “That is the definition of a trading platform – and most crypto platforms today meet it.” This is true whether the exchange calls itself centralized or not.

Industry Pushback

The crypto industry is a long-time advocate for U.S. regulations that bring clarity to the way companies and activities must operate. However, prominent crypto executives and lobbyists also say that the SEC’s position of requiring them to register and adhere to existing securities laws will not work for this sector. Gensler, the SEC’s chief counsel, has consistently argued that existing securities laws are adequate for the cryptocurrency industry.

Last year, the SEC proposed this exchange-definition-rule and other proposals without mentioning its intentions regarding crypto specifically.

In February, the agency issued a second proposal that would prohibit investment advisers from holding assets in crypto firms.

The SEC is closing in on the crypto business that claims there’s no way to regulated finance.

The agency disclosed that it received nearly 400 comments on the revised proposal this week and held 35 meetings with Wall Street lobbyists and industry self-regulatory groups, as well as the Bank of England, to discuss the project. The reopened comments period allows crypto lawyers and industry self-regulatory organizations another 30 days to argue for or against the rule.

The industry was against the definition of the new exchange even though it didn’t mention crypto. They assumed that the definition was referring to digital asset platforms.

In a letter sent to the SEC in 2022, the Blockchain Association and DeFi Education Fund claimed that the proposal failed to acknowledge or adapt to the fundamentally different ways individuals could conduct asset exchanges by using DeFi protocols. It would instead improperly apply to software or developers regulations that are designed for exchanges such as the New York Stock Exchange.

Rep. Patrick McHenry, the chairman of House Financial Services Committee, which oversees the SEC and Gensler , wrote to Gensler along with another member, stating that the agency appeared to be trying to “expand the SEC’s jurisdiction beyond its current statutory authority in order to regulate market players in the digital assets ecosystem, including decentralized finance.”

Circle Internet Financial wanted to know more about the crypto rules.

The company suggested in its comment letter that “in view of the unique architectural features of digital asset markets we suggest the commission would be best served by a broad-ranging concept release that focused on digital assets and how to achieve their policy goals given the unique characteristics of these markets.”

Some people were happy last year that crypto could be included in this SEC oversight.

Better Markets, an advocacy group for stronger protections of the financial system in Washington, wrote last year in a letter that the cryptocurrency industry was rapidly expanding. Some industry lobbyists were insisting on the fact that their platforms and offerings fell outside the securities laws. “But it is clear that the Securities and Exchange Commission must apply securities regulations equally to all securities, regardless of how innovative, popular or profitable these offerings may be.”

DeFi has had a rough month in U.S. policy circles. The U.S. Treasury Department made it clear last week, that DeFi services are subject to anti money laundering laws. They said the platforms were used by criminals as well as terrorists.

UPDATE: (April 14, 2023 at 15:48 UTC). Adds SEC votes to approve.

Nikhilesh De.