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FAQ

What’s the SEC proposing? Do we know what it covers?

No one’s quite sure, which is exactly the problem.

In a nutshell, the proposed rule would potentially require any organization, association, or group of persons that “makes available” a “communication protocol system” (CPS) to comply with financial regulations designed for organizations like the New York Stock Exchange if the CPS allows people to interact and agree to terms of a trade. 

​The language is so broad that even the proposal itself clarifies web chat providers like Facebook Messenger and utilities like cell phones—which could meet the novel definition of a CPS—would not be required to register as securities exchanges (footnote 72). If utilities and web chat providers could be captured, what couldn’t?

​Doesn’t this proposal just relate to government securities?

No.

The press release announcing the proposal is titled “SEC Proposes Amendments to Include Significant Treasury Markets Platforms Within Regulation ATS.” It “would enhance investor protections and cybersecurity for alternative trading systems that trade treasuries and other government securities,” the SEC’s press release explains. 

But the actual text of the proposed rule is so broad that it potentially implicates systems well beyond those related to “treasuries and other government securities.”

As SEC Commissioner Hester Peirce explained in a dissent accompanying the announcement, “Unexpectedly for me—and perhaps for many in the market—this proposed amendment goes far beyond the scope of the concept release… What the staff is recommending for our consideration today is an expansion in the definition of exchange that would apply to any trading venue, including so-called communication protocol systems, for any type of security, not just for government or fixed-income securities.”

What happens next?

The public has until April 18th to comment on this 591-page proposal and respond to its 220 separate requests. After that short time, the Commission will consider responses and then decide whether to move forward with a final rule—either with or without additional clarifications based on comments from the public. 

The more that people comment requesting clarification, the likelier it is the SEC will consider changes.

Additional Information & Resources:

• Gabriel Shapiro, “Urgent Considerations of Impact on Blockchain/DeFi of the SEC’s Proposed Regulation ATS Amendment“

• Kirill Bryanov, “Stealth rulemaking: Is proposed SEC rule with no mention of crypto a threat to DeFi?“

• Federal Register Notice

• SEC Press Release

• Commissioner Hester Peirce’s Dissent

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Having trouble submitting a comment? Other questions or concerns?

Let us know at contact@defieducationfund.org. We’re here to help.

Example Draft Comment (Text included and editable in mailto link)

To: rule-comments@sec.gov

Subject: File Number S7-02-22

“I am writing with deep concern about the SEC’s proposal to expand its definition of an “exchange” and an “alternative trading system” (ATS). As written, the proposed rulemaking does not clarify what additional trading systems or protocols the SEC intends to regulate under the expanded definitions. Since existing SEC rules and regulations applicable to exchanges and ATSs are essentially designed to regulate stock exchanges, this ambiguity causes grave concern. It is also completely unclear how any trading system or protocol not already regulated by the SEC could possibly comply with the rules designed for exchanges and ATSs. That the Commission felt the need to clarify the expanded definition would not capture platforms like web chat platforms and utilities exemplifies the problem: if the expanded definition of a securities exchange could be interpreted to capture such software, what software couldn’t be?

“Accordingly, it seems obvious to me that this proposed rulemaking will be unable to accomplish successfully any of the SEC’s policy objectives. The severe regulatory uncertainty this rule would create would not enhance oversight, nor would it improve regulatory outcomes; instead, it would stifle innovation, entrench existing businesses and business models, and harm the U.S. public, who might otherwise have benefited from a flourishing and competitive market ecosystem. 

“Consider how such regulatory uncertainty could affect trading software. First of all, does the proposed rule apply to trading software at all, and if so, to which types of trading software? Would individual developers be required to register as an exchange or ATS solely because they contributed discrete lines of code to a broader tool that could possibly be used to help buyers and sellers interact? Must software developers now consider themselves responsible for trading activity that occurs completely without their involvement?  

“These are questions that market participants will be compelled to ask, and to which neither they nor any policy maker will be able to provide answers. It is imperative that the SEC clearly define what it does and does not intend to newly capture with this rulemaking. And unfortunately, the SEC did not. 

“Nowhere else is the inappropriateness of this regulatory ambiguity more pointed and punishing than in the realm of decentralized finance (DeFi). Within DeFi, parties transact using open-source software. DeFi software is often built by multiple parties; one developer may create only a single part of the ultimate protocol, and developers have no ongoing oversight or control over either the further development of that protocol or its operation. It would not simply be difficult and nonsensical for such a developer to fulfill the supervisory responsibilities for trading activity that the SEC requires of an exchange; it would be impossible.

“That means the expanded definition in the proposed rulemaking would have but one inevitable outcome: developers would have to second-guess—at the very least—contributing to these kinds of open-source projects. Of course, without these contributors, these open-source projects cannot develop—at least not in the United States. This is a clear example of the chilling effect of the regulatory uncertainty the Commission would create with this rule.

“Merely making software available to the public should not be captured under the SEC’s exchange or ATS registration framework, and the SEC should clearly state that.  

“As a policy matter, SEC regulations should not prohibit the public from benefiting from innovations in financial markets.  While relatively new, DeFi protocols have already provided significant benefits and innovations, like offering people the security and transparency of blockchains in an accessible, nondiscriminatory, democratic way. Moving forward with this proposal as written would create a regulatory advantage for incumbents in traditional finance. What’s more, it would cede the future of these DeFi markets to other countries—including significant competitors to the United States who are already seeking to create more attractive regulatory regimes for open-source financial software development. 

“Consequently, I strongly oppose the SEC’s unacceptably broad proposal to expand its definition of an “exchange” and an “ATS,” and I emphatically urge the SEC to reconsider.  At a minimum, the SEC should issue a new proposal that makes clear exactly which trading systems and protocols the SEC intends to regulate. Furthermore,  this new proposal should have a robust cost-benefit analysis and comment period.  Finally, this new proposal should provide the public adequate time to respond—rather than the, as Commissioner Peirce called it,  “unconscionably reckless” 30-day period allotted for responses to this incredibly complex proposal. The SEC should understand that any proposed rulemaking that is 654 pages long and contains more than 220 separate requests for comment on a variety of issues requires more than 30 days to study and analyze.

“For all of these reasons, I stand opposed to the SEC’s proposal, and respectfully request that the SEC take actions to rectify what I consider to be a grave mistake.”

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