SEC Establishes Oversight Rules for DeFi ‘Dealers’

The U.S. Securities and Exchange Commission (SEC) expanded the definition of a “dealer,” bringing more financial operations, including those involving cryptocurrencies, under its jurisdiction.

Three out of five commissioners voted in favor of the proposal. Digital asset advocate Hester Peirce and her colleague Mark Uyeda opposed it.

Under the new provisions, market participants managing and owning assets exceeding $50 million must register with the SEC as dealers.

“The Commission does not exclude any specific type of security, including digital assets, from the final rules. […] The dealer framework represents a functional analysis based on a person’s activity in trading securities, not the type of security traded,” the SEC stated.

The text of the rules highlights objections and confusion from crypto industry participants regarding the SEC’s amendments and their application to the DeFi sector.

“While some have stated that the proposed rules should not apply to so-called DeFi, the question of whether a dealer is involved in any particular transaction or structure (regardless of what it is called) is a fact-and-circumstances analysis. There is nothing in technologies like blockchain protocols and smart contracts that would preclude defining activities with cryptocurrencies as dealer activities,” the agency explained.

According to the document, the Commission considered excluding digital assets from the rules but decided that this would lead to “negative competitive consequences,” as it would give crypto firms an advantage over traditional organizations.

The provisions will take effect in 60 days and will be fully implemented by April 2025.

A Wall of Criticism

The SEC first proposed similar amendments in March 2022. At that time, the DeFi Education Fund described the rules as “flawed and cumbersome.”

“The Commission not only failed to grasp the essence of our concerns but also did not articulate any noticeable path to compliance for DeFi market participants. Imposing obligations on ecosystem entities that are impossible to fulfill is wrong, impractical, and hostile to innovation,” the organization stated.

The fund also delved into the issue of law enforcement concerning automated market makers (AMM), which are essentially “execution protocols.” The company explained that AMMs create liquidity pools and lock them in smart contracts. This process facilitates trading, but it is unclear how it will be defined from a regulatory perspective.

SEC documents indicate that Cody Carbone, Vice President of Policy at the Chamber of Digital Commerce, called the adopted rules “another example of the regulator’s ongoing hostility towards the digital asset industry.”

SEC Commissioner Hester Peirce opposed certain aspects of the law. She noted that the release “does not spend much time on cryptocurrency but explains that AMMs may have to register as dealers under the final rules.”

In response, SEC representatives stated that automated market makers are “more than just software.”

“Under the Commission’s approach, any person can be a dealer if they buy and sell securities as part of their regular business. This change creates additional regulatory confusion for other markets, including crypto securities,” Uyeda added.

Peirce believes the main reason crypto market participants do not comply with SEC requirements is a misunderstanding of the agency’s rules.

Earlier, analysts at investment bank Berenberg suggested that the next “victims” of the regulator could be stablecoins and the decentralized finance sector.

In 2021, SEC Chair Gary Gensler described the DeFi direction as one of the most innovative. However, in his view, this does not exempt it from regulation.

In September 2023, the head of the regulator’s enforcement division, David Hirsch, stated that the agency is examining certain centralized exchanges and DeFi protocols for potential legal violations.