Cryptocurrency platforms fear they may face tougher regulatory scrutiny after the U.S. Securities and Exchange Commission proposed new rules that could bring more trading of digital assets under his responsibility.
The amended rules seek to fill a regulatory loophole by requiring platforms outside SEC oversight to comply with existing standards intended to protect investors and promote fair and orderly markets.
The new 654-page guidelines, backed by the SEC in a vote last month, do not explicitly refer to digital asset exchanges. But crypto industry and legal experts believe the industry could fall under an expanded SEC definition of an “exchange,” which officials say aims to capture platforms trading securities that don’t. fall outside the scope of the agency.
“When it comes to digital assets, I think there are definitely concerns,” said Stephen Wink, partner at Latham & Watkins.
The SEC declined to comment.
The broader definition of an exchange would include platforms that “make available . . . communication protocols” through which “buyers and sellers can interact and agree to the terms of an exchange”.
“This change could potentially bring more people into the digital asset space,” Wink said.
Cryptocurrency advocates said the rules could affect so-called automated market makers such as Uniswap, which facilitated more than $70 billion in trading volume in January.
The exchanges run on open-source software with no central checkpoints, allowing traders to trade tokens without going through intermediaries – a feature that has complicated the application of existing regulations to these platforms. The development teams that created the exchanges maintain that they do not have the authority to shut them down.
SEC Chairman Gary Gensler said the proposed changes would modernize guidance related to “defining an exchange to cover platforms for all sorts of asset classes that bring buyers and sellers together.”
If the platforms were affected by the new guidelines, they likely failed to comply with securities laws, said a person familiar with the regulations, adding that platforms that did not trade securities did not need to comply with existing or proposed rules.
The agency’s proposal has rattled the crypto industry, which is looking to analyze the new rules. The SEC has set aside 30 days for public comment on the proposal, a deadline that some cryptocurrency advocates have complained is too short.
The new rule is “not very clear whether code developers, deployers or interface providers are affected or not,” said Michael Egorov, founder of decentralized exchange Curve Finance.
“I think the rule wouldn’t fly in this form, at least in DeFi [decentralised finance]Egorov said, adding that he doesn’t see the SEC as “malicious” toward the industry.
“There have been a large number of inquiries about this proposed rule,” said Joshua Ashley Klayman, co-head of global technology sector at Linklaters. “Some people came up and said, ‘Do you think this was for the digital asset space?’ . . . ‘Is it a Trojan horse?’”
But for Klayman, the new guidelines were designed to reflect new ways of doing business, not to “intentionally trap” a particular industry.
The Association for Digital Asset Markets (ADAM), a trade group whose members include the FTX exchange, wrote in a public comment that the amendments could expand SEC oversight of cryptocurrency exchanges and decentralized networks” in a way not publicly mentioned or discussed” by the proposal. . ADAM has asked the SEC to extend the comment period by at least 60 days.
The regulatory implications for crypto platforms if the rules are adopted – and applied to the industry – remain unclear. Experts say potential effects include increased registrations with the regulator or crypto exchanges dumping securities-qualified tokens to avoid SEC oversight. A wave of enforcement measures is also possible.
The proposed rules come after repeated calls from Gensler to tighten scrutiny of a sector he says provides insufficient protection for investors. He said many digital products could be considered securities, but refrained from issuing new rules, arguing that existing laws are clear enough.
Regulators have accelerated enforcement actions against crypto players. Coinbase said in September that the SEC had warned it would sue the company if it launched a digital asset lending product that it ultimately abandoned.
For the latest news and views from the FT’s network of correspondents around the world, sign up for our weekly newsletter #fintechFT
Register here with one click