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SEC Asserts DeFi is Caught Under Securities Rules, Reopens Proposal to Widen Definition of Exchanges

Coindesk |Jesse Hamilton| Apr 17, 2023

Coindesk TV Hester Peirce - SEC Asserts DeFi is Caught Under Securities Rules, Reopens Proposal to Widen Definition of Exchanges

Image: Coindesk TV

Unless Congress legislates otherwise, U.S. oversight will hold most of the crypto world inside the SEC’s jurisdiction as the agency moves to make its reach increasingly explicit.

  • The U.S. Securities and Exchange Commission's (SEC) warning shot last week that decentralized finance (DeFi) could be thrown into its expanding definition of what makes a securities exchange is the latest move to formalize what Chairman Gary Gensler has been saying: Crypto belongs in the securities world and will be regulated that way.
  • the agency voted 3-2 to reopen an existing proposal to widen how it defines operations that need to be regulated as securities exchanges, is aimed at bringing in new technologies that would now include DeFi. To comply with this and other SEC initiatives, crypto operations would have to decide whether to make fundamental changes – such as increased centralization. Some of those changes could threaten what’s different about their approach to money and investing.

See:  Should the SEC Be Allowed to Wage an Unsupervised Dirty War on Crypto?

Jason Gottlieb, Laywer at Morrison Cohen in New York:

The SEC is simply seeking to ban DeFi protocols in America.  In doing so, the SEC is substituting its own opinions for Congress' prerogative on a major question, central to the future of the American economy. [The change] would sweep decentralized software protocols into a regulatory framework that was not built for them, and with which they literally, technologically cannot comply.

The SEC has now mostly arrayed its pieces on the regulatory battlefield:

  • It targeted trading platforms as unregistered exchanges, and has warned Coinbase its turn for an enforcement action is coming.
  • It labeled a number of tokens, yield products and staking services as securities.
  • It proposed a rule that would likely insist investment firms custody their crypto assets outside of the industry.
  • It proposed a “best execution” rule that would include any firms trading crypto security tokens.
  • Apart from last week’s vote to add DeFi to its exchange definition, last year the agency proposed a new way to define securities dealers that could similarly rope in DeFi activity.

Read:  Hong Kong Rolls Out Red Carpet to Crypto Firms Including Mainland China

  • In testimony prepared for a Tuesday hearing of the House Financial Services Committee, SEC Chairman Gary Gensler said that "nothing about the crypto markets is incompatible with the securities laws." He also criticized crypto platforms for trying to fulfill multiple roles without registering for federal oversight, and noted that calling yourself a DeFi platform is not an excuse to defy the securities laws.
  • Gensler's rhetoric is being put into action with the latest enforcement action against Bittrex and last month's case against Beaxy. Commissioner Peirce, who has been called "Crypto Mom" for her past support of the sector, said that this marks a "very consequential moment" and that the enforcement division will ultimately make the calls on how DeFi transactions fit into SEC rules.

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CNBC  Christina Wilkie | Apr 18, 2023

Gensler defends SEC’s crypto crackdown in marathon House hearing

  • Securities and Exchange Commission Chairman Gary Gensler faced a barrage of criticism from House Republicans on Tuesday over his agency’s crackdown on cryptocurrency trading platforms.
  • In a House Financial Services Committee hearing, Republicans argued that the SEC's disclosure rules were not suitable for decentralized digital currency exchanges and could push digital platforms overseas, weakening America's status as a hub for cryptocurrency innovation. They also argued that the SEC's regulation by enforcement was not sustainable. However, SEC Chairman Gary Gensler rejected these notions, stating that the crypto industry understands the law and should come into compliance if providing exchange, broker-dealer, and clearing services of crypto security tokens.
  • The prospect of legislation to regulate digital currencies has faded this year, but major crypto industry groups are planning to spend millions of dollars this year to lobby Congress and the Biden administration.
See: 

Wall Street Opposes a Controversial Retail Investor Proposal by SEC Chair Gary Gensler

SEC Ignores All Recommendations by the Small Business Capital Formation Advisory Committee

Gary Gensler, SEC Chairman:

We have a clear regulatory framework built up over 90 years.  The exchanges are “just a bunch of intermediaries in this market that think they have a choice. They don’t have a choice. They’re noncompliant generally, and they need to come into compliance.

Fortune | Justin Doom | Apr 18, 2023

House committee chair blasts SEC’s Gensler on defining Ether: ‘You won’t answer my question, and you’re the head of that agency’

“Back in 2018,” said the chair of the House Financial Services Committee, at a Tuesday hearing, “then-SEC Corporation Finance Director Bill Hinman stated that he believed Ether was not a security. Last month, CFTC Chair [Rostin] Behnam expressed his view that Ether is a commodity. The state attorney general of New York asserted in a court filing last month that Ether is a security. Clearly, an asset cannot be both a commodity and security. Do you agree?”

Gary Gensler, chair of the Securities and Exchange Commission, smirked.

“Actually,” he responded, “all securities are commodities under the Commodity Exchange Act. It’s that we are excluded commodities. But I would agree that a security cannot be also an excluded commodity and an included commodity.”

McHenry, an advocate of establishing rules for stablecoins, pushed onward.

“Okay. How would you categorize Ether then?”

“I think,” continued Gensler, “that the general sweep of what Congress did, not just in the ’30s but as—”

“I’m asking you, sitting in your chair now, to make an assessment under the laws as [they] exist: Is Ether a commodity or a security?”

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“Without speaking to any one—”

“I know, you’ve repeatedly said you’re not going to speak to one, except you’ve spoken to one: Bitcoin. So I’m asking you to speak to a second one, [with] the second-largest market cap.”

“In speaking to the tokens,” replied Gensler, “there’s 10 to 12,000. If there’s a group of entrepreneurs—”

“I’m asking you about one.

“…”

McHenry later asked Gensler if they could at least agree on how the existing lack of clarity was affecting the marketplace.

“I think that the clarity is there,” Gensler said. “The law is clear.”

Answered McHenry: “Let me be explicit about this: The market doesn’t see it.”

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