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Communication protocol systems: SEC’s big DeFi move

Protocol | Tomio Geron | Feb 28, 2022

taking a closer look - Communication protocol systems:  SEC’s big DeFi moveGary Gensler has been talking about taking on the crypto industry since he started last April. Now he’s getting down to business. The SEC is taking on the crypto industry in a way that could have far-reaching implications, particularly for DeFi, by expanding the agency’s regulatory authority over decentralized trading systems. The potential mechanism is a rule quietly proposed in January that would expand the definition of an “exchange” to include “communication protocol systems.”

“It’s the biggest, most profound rule-making the SEC has ever had,” said Nicholas Losurdo, a partner at law firm Goodwin who previously worked at the SEC. “It has the ability to sweep in a lot of DeFi and crypto, whereas now they don’t have jurisdiction.”

See:

The comment period on this proposal is still open, but some crypto industry officials are concerned enough that they’ve called on the SEC to extend its comment period to 90 days so that more industry participants can give comments.

This change in definition could mean regulating not just centralized crypto entities but even decentralized finance protocols, according to Losurdo.

[The 654-page proposal] makes key changes, such as changing the definition of an “exchange function” to bringing together people who interact, instead of just “orders” as it was before.  This broadening of the scope of what an exchange is could pull in a range of crypto products, Losurdo said, since the SEC document says that it applies to “trading any type of security.” And Gensler has been clear that he believes that many digital assets are in fact securities.

The SEC is already trying to get more of the crypto world under its purview. So far it’s a mixed bag.

See: Top Crypto Lawyer says Don’t wait for the SEC

It has gone aggressively after crypto lending, recently settling with BlockFi for $100 million. But that involved a centralized lending operation. It’s not clear how the SEC would pursue truly decentralized lending, or more complex operations like staking.

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