SEC’s Comments Raise Concerns for Crypto’s Decentralized Exchanges

SEC‘s Comments Raise Concerns for Crypto’s Decentralized Exchanges

KEY POINTS:

• The SEC has sought to clarify that decentralized crypto exchanges are subject to the same rules as centralized ones.

• The SEC aims to retain regulatory jurisdiction over space, but is losing ground in its battle against Ripple.

• US regulatory bodies (SEC and CFTC) disagree over categorizing certain cryptocurrencies.

On Friday, the Securities and Exchange Commission (SEC) convened to reestablish their belief that decentralized crypto exchanges (DEXes) should be subject to the same regulation as centralized ones. This represents an expansion of the original definition, and has not been made without some controversy.

Many in the crypto community have criticized the approach, and consider regulation of decentralized exchanges to be both impractical and outside the jurisdiction of the regulator. Even some senior members of the SEC itself have said that Gary Gensler's (head of the SEC) recent campaign against DeFi has overstepped the mark.

Others, however, have advocated for increased regulation of the space to protect users and help increase its adoption. Gensler would seem to be flexing the bodys authority once again – saying to crypto users to “make no mistake” that DEXes are under the jurisdiction of the SEC.

Is the SECs jurisdiction slipping？

In recent months, the SEC‘s authority over the crypto world has been somewhat undermined – which might explain the motivation for Gensler’s recent comments.

Aside from tension between the SEC and the Commodities and Futures Trading Commission (CFTC) regarding which jurisdiction crypto falls under, the regulator is also losing ground in its battle with Ripple regarding its alleged status as security. Ripple investors are fairly certain that the

cryptocurrency

will prevail and win the lawsuit, which has been ongoing since 2020 – prompting a 35% price gain over the past month.

What happens now？

Its unknown how these comments will affect DEXes yet, or what regulatory ramping up they might be intended to warn the space of. It could mean the decentralized exchanges like Uniswap or SushiSwap might be made responsible for providing reports surrounding their activity and policing who is able to use the applications.

Although with no centralized body in charge of running the platform, it's difficult to see who could even be held accountable if the required changes are not implemented.

DeFi-platforms allow users to lend, borrow and save in digital assets, bypassing the traditional gatekeepers of finance such as banks and exchanges.

The plan, first proposed in January 2022, would expand the definition of an exchange to include platforms that use “communication protocols” such as request-for-quote systems. The change, if adopted, is expected to capture many more venues for regulation beyond traditional exchanges that bring together orders from multiple buyers and sellers in a marketplace.

The proposal was aimed at Treasury markets and marketplaces for other government securities, where inter-dealer crypto brokers have functioned like exchanges without registering them as such. But crypto firms pushed back on the plan amid growing tensions with the regulator. Many in the industry have said existing securities regulations are inappropriate and the sector needs fresh rules.

Some DeFi platforms may fall under the proposed definition, but others may already be considered exchanges by the existing one, SEC officials said this week.

The officials estimated about dozen crypto firms would fall under the expanded definition, but declined to provide any more specifics about which firms.

“Make no mistake: many crypto trading platforms already come under the current definition of an exchange,” SEC Chair Gary Gensler said in prepared remarks published on Friday.

Most crypto trading platforms meet that definition, regardless of whether they call themselves decentralized, Gensler said.

Friday's public vote to reopen the comment period for 30 days was unusual.

Typically, the commission would decide behind the scenes if extending a public comment period is necessary.

The meeting underscored the ideological divide among the commissioners, with both Republican commissioners dissenting.

(About decentralized exchanges)

Decentralized crypto exchanges (DEXs) are a type of

cryptocurrency exchange

that operates in a decentralized manner, meaning that they do not rely on a central authority or intermediary to facilitate transactions between buyers and sellers. Instead, DEXs use blockchain technology and smart contracts to allow users to trade cryptocurrencies directly with each other. This eliminates the need for a central authority to control the exchange, making DEXs more secure and resistant to hacks and manipulation. Some popular DEXs include Uniswap, PancakeSwap, and SushiSwap.