On February 6, the United States Securities and Exchange Commission (SEC) introduced strict rules for people involved in providing liquidity. These rules cover not only federal securities laws but also impact cryptocurrency and decentralized finance (DeFi).
New Rules Targeting Crypto Liquidity
The rule, which was proposed in March 2022, finally got the green light from the SEC after 2 years with a 3-2 majority vote during a meeting on Tuesday.
The approved 247-page rule will impact those dealing with crypto assets defined as securities or government securities, except for those with less than $50 million in assets. It also impacts the decentralized finance (DeFi) sector, as outlined in the rule.
According to the rule, individuals trading in crypto asset securities within the DeFi market must register as a “dealer” or “government securities dealer” if their activities meet the criteria of being “part of a regular business.” This includes regularly buying and selling crypto assets, and providing liquidity to others, as outlined in the qualitative standard.
Despite the approval, some commenters argue that the rule is unfair for DeFi products, citing their decentralized nature without a central controlling body, functioning solely as software.
Industry Voices Express Worries
In response to the SEC’s decision, the DeFi Education Fund strongly criticized the move, calling it “misguided and unworkable.”
CEO Miller Whitehouse-Levine believes the SEC failed to consider the practical difficulties DeFi entities face, suggesting the rules are unfriendly to innovation.
Cody Carbone, Vice President of Policy for the Chamber of Digital Commerce, shared similar sentiments, criticizing the SEC for its ongoing unfriendliness towards the digital asset industry. He stated that the SEC did not consider the industry’s viewpoint.
Gensler Defending the Rules
SEC Chair Gary Gensler defended the regulatory changes, highlighting the $50 million exception and the importance of protecting investors in both crypto and non-crypto spaces. He argued that these rules align with Congress’s intentions for fair competition.
During the meeting, Republican Commissioner Hester Peirce, one of the two votes against the rules, raised questions about the inclusion of automated market makers (AMMs) in the rules. She asked whether AMMs, often considered as software protocols, should register as dealers.
The SEC responded, saying that AMMs are more than just software. However, Peirce expressed concerns about transparency and market participant’s understanding of SEC rules.
Countdown to Implementation
The final rules will come into effect 60 days after being published in the Federal Register, with a one-year compliance period. As the crypto industry gears up for increased regulatory attention, the full impact of these SEC rules remains uncertain in decentralized finance.