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DeFi Advocates Call out the SEC (Again) over attempts to define ‘Exchange’

ComplianceX | Jack Kelly | Apr 20, 2022

defi advocates cry foul at SEC - DeFi Advocates Call out the SEC (Again) over attempts to define ‘Exchange’For the second time in a month, the Securities and Exchange Commission has the crypto industry up in arms about what it calls an attempt at backdoor regulation that, depending on who you ask, falls anywhere on the spectrum between opaque and unconstitutional.

At issue is an expansion of the definition of a stock exchange to fit what the SEC calls “communications protocol systems” that “bring together buyers and sellers of securities” — which many experts believe would include cryptocurrency exchanges, and specifically, decentralized exchanges (DEXs).

See:  Communication protocol systems: SEC’s big DeFi move

Digital assets are not mentioned anywhere in the bill — mirroring complaints made in late March about another rule change that would define the automated market maker (AMM) smart contracts that act as liquidity providers in decentralized finance (DeFi) projects like lending/borrowing platforms.

Digital assets were mentioned in one footnote in that 200-page rule.  That rule, which would encompass even software developers to register as securities dealers, according to, Delphi Digital Labs’ general counsel Gabriel Shapiro who called it:

An all-out shadow attack on decentralized finance.  More regulation-by-enforcement” that is “far from technology-neutral”.  [The result will be to] to entrench incumbents who have legacy centralized business models and amount to a de facto prohibition on the decentralized finance models that have arisen.

As for the exchange-focused rule, Shapiro said in a Twitter chain Monday (April 18) that it was “more regulation-by-enforcement” that is “far from technology-neutral” and will ensnare even DeFi software developers.

See:  OECD Report: Why DeFi Matters and Policy Implications

Coinbase’s Chief Legal Officer, Paul Grewal said:

The SEC is going beyond its authority under the Exchange Act in redefining exchange. An exchange is a facility that performs the ‘functions of a stock exchange, as that term is generally understood.  The SEC should provide clearer guidance in the future about how the market should apply its rules.

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