In April, the U.S. Securities and Exchange Commission (SEC) reopened the comment period for a proposed set of rules that could redefine various blockchain protocols as U.S. regulated securities exchanges. This move, aimed at reining in decentralized finance (DeFi), has sparked concerns among the crypto community due to its potential impact on the industry and set the stage for a clash between regulation and technology.
The main issue with the SEC’s proposal lies in trying to treat blockchain protocols as regulated exchanges, which seems incompatible with the Exchange Act of 1934 and existing exchange regulations. Such a classification could create confusion, with no clear indication of how it would work in practice and who would be considered part of an exchange. For instance, the proposal does not explain the threshold of significant token ownership or when a service provider might assume regulatory responsibilities. Furthermore, the existing law requires a group of persons to act in concert to be considered an exchange, a principle the SEC appears to have ignored.
To complicate matters further, blockchain protocols often involve participants from outside the United States, raising questions about extraterritorial application of U.S. securities laws. So far, the SEC has failed to address this uncertainty in its proposal.
The 2023 draft of the proposal offers little improvement, leaving many long-standing issues unresolved. By maintaining ambiguity, the proposed rule forces stakeholders in the blockchain space to guess at the requirements, putting them at risk of hefty penalties should their interpretations prove incorrect.
Some critics of the proposal argue that it might disincentivize the development of free, open-source software, essentially amounting to a ban on blockchain in the U.S. Furthermore, the SEC’s apparent certainty about the scope of their current regulation, suggesting that the existing definition of “exchange” already applies to blockchain protocols, leaves stakeholders questioning their regulatory status.
Opponents of the proposal, including SEC Commissioner Hester Peirce, view it as embracing stagnation and discouraging innovation. The SEC has failed to provide a meaningful analysis of the benefits and costs of their proposal, merely asserting that their expanded regulatory purview is the main benefit.
Conversely, the proposal seems to underestimate the number of blockchain protocols affected and overlooks the additional burden placed on ordinary individuals participating in the ecosystem. Additionally, there are concerns that regulating code as speech could lead to stifling of creative and expressive development in the tech industry.
In conclusion, the SEC’s proposed rules have stirred up considerable debate among the crypto community and could lead to unforeseen negative consequences for the industry. The commission should consider withdrawing the current proposal or explicitly carving out blockchain, as the current approach appears to be unlawful. The balance between regulations and technological progress must be carefully considered, and any potential rules must be weighed against their impact on innovation, market participants, and global competitiveness.
Source: Coindesk
