Earlier this week, the SEC proposed 654 pages worth of new rules regarding alternative trading systems for securities, also known as ATS. In this proposal, the SEC looks to dramatically increase the scope of what is viewed as a securities exchange and what entities have obligations to register as securities exchanges. Lawyer Gabriel Shapiro does an excellent job covering the impacts of the new rules here.
If implemented, these changes could significantly affect the crypto industry. I thought I would take some time to delve into what these changes are and how the SEC is trying to implement them quickly without industry input.
Dramatic Broadening of what Constitutes a Securities Exchange
Specifically, the SEC, which is led by Gary Gensler, states that the changes in the proposal are intended to “cover platforms for all kinds of asset classes that bring together buyers and sellers.” Consequently, this broad interpretation could easily be applied to effectively nearly every crypto related institution.
Furthermore, the SEC is looking to change what it means to be a securities exchange. In this document, they broaden the meaning to systems that make available protocols where buyers and sellers communicate their securities trading interest. Of course, decentralized exchanges that utilize an AMM structure could fall within this categorization.
ATS’ under this document need to track and identify the orders on their platform and disseminate this information on the users to the SEC, which is impossible for any DEX because they structurally do not amalgamate user data nor are they controlled by a centralized party that could do so.
In essence, the SEC is looking to create an impossible regulatory framework for crypto entities to comply with should it pass, giving them the easy ability to go after all protocols.
Limited Response Time
The SEC has given only 30 days for industry participants to make their voices heard before moving forward. SEC commissioner Hester Pierce wrote a dissenting statement of these actions, correctly acknowledging that 30 days was not an appropriate amount of time for the public to digest this new information.
Note that Hester Pierce was a trump appointee, and thus the weight of her words might not resonate with the Gensler regime despite her incredibly deep knowledge of the crypto space. She is belovedly known as "crypto mom" in the space.
We are continuing to move into a world of hostile US regulators, and I do not think this trend has any chance of reversing before the mid-terms. There is a real threat that, effectively overnight, the government could implement policy via executive orders or other mechanisms that make many areas of DeFi, and the people who set them, guilty of illegal activity.
Furthermore, from my interpretation, the proposed ATS Amendment would actually supersede all prior no-action letter that have been issued, meaning that anyone who has settled with the SEC on these types of matters in the past or tried to work in a compliant manner with the SEC to get a no-action letter could once again be caught in the cross hairs.