DeFi Shouldn’t Have to Worry About the SEC’s Expanded Broker Rule

Many
are
concerned
that
a
recently
passed
effort
to
expand
the
definition
of
a
broker-dealer
will
severely
hamper
the
decentralized
finance
(DeFi)
industry
—
mostly
due
to
a
typical
lack
of
clarity
involved
in
the
rule-making
process.
Is
there
something
actually
to
worry
about?

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In
short,
on
Tuesday,
the
U.S.
Securities
and
Exchange
Commission
(SEC)
adopted
a
rule
that
will
require
more
firms
that
“routinely
work
with
securities”
(like
hedge
funds
and
market
makers)
to
register
as
dealers
and
submit
to
the
stricter
oversight
that
entails.
The
rule
was
originally
suggested
by
the
U.S.
Treasury
Department
to
fix
liquidity
problems
in
the
Treasury
bond
market
by
addressing
the
regulatory
gap
that
formed
with
the
rise
of
electronic
trading.

Traditionally,
there
has
been
a
distinction
between
investors,
who
make
directional
trades
(i.e.
betting
some
stock
will
go
up
or
down)
and
dealers,
typically
large
institutions
that
buy
both
sides
of
the
market
to
provide
liquidity
for
those
traders.
The
old
definition
of
a
broker
included
any
company
“engaged
in
buying
and
selling
securities
…
as
a
part
of
a
regular
business,”
with
“regular
business”
essentially
referring
to
the
service
of
market
making.

The
new
rule
essentially
expands
that
definition
to
include
any
institution
that
makes
a
lot
of
money
(or
tries
to
make
a
lot
of
money)
capturing
bid-ask
spreads
—
like
quant
funds
and
high-frequency
traders.
According
to
Reuters,
only
about

48
firms
are
expected
to
have
to
come
into
compliance
because
they
now
trade
enough,
in
both
directions,
largely
through
automated
trading
software,
to
be
considered
dealers.

The
rule,
scheduled
to
go
into
full
effect
April
2025,
is
causing
alarm
in
crypto.
Why?

First,
there
is
the
fact
that
the
rule
will
apply
to
institutions
that
regularly
trade
crypto,
because
under
its
current
leadership
the
SEC
considers
nearly
all
cryptocurrencies
and
tokens
to
be
securities.
But
more
importantly,
decentralized
protocols
like
Uniswap
and
other
automated
market
makers
(AMMs)
might
just
fit
the
expanded
definition
of
a
broker,
without
an
explicit
carve
out.

Crypto
advocates
including
the

Blockchain
Association
and
DeFi
Education
Fund
have
raised
jurisdictional
concerns
about
the
SEC’s
ability
to
oversee
crypto,
in
much
the
same
way
that
Coinbase
and
Binance
have
raised
the
“major
questions
doctrine”
—
a
mandate
that
restricts
federal
agencies
from
regulating
economically
important
industries
without
explicit
congressional
approval
—
in
their
ongoing
legal
challenges
with
the
agency.

The
SEC
specifically
called
out
crypto
in
its
announcement,
making
particular
note
of
“so-called
DeFi”
organizations
that
asked
for
exemption
when
the
expanded
definition
was
first
proposed.
Two
SEC
Commissioners,
the
usual
suspects
of

Hester
Peirce
and
Mark
Uyeda,
rejected
the
decision,
in
part
because
of
the
regulatory
spillover
and
confusion
it
causes
for
crypto,
but
mostly
because
it
“obliterates
this
distinction”
between
regular
investors
and
brokers
in
traditional
markets.

On
Tuesday,
Peirce
grilled
her
SEC
colleagues
specifically
on
AMMs,
and
how
automated
software
could
be
expected
to
register
with
the
agency.
She
also
asked
whether
software
coders
or
AMM
users
would
have
to
regulate.
The
response
from
SEC
Director
of
the
Trading
and
Markets
Division
Haoxiang
Zhu
is
telling:
it
depends
on
the
“facts
and
circumstances.”

See
also:


U.S.
SEC
Clears
‘Dealer’
Rule
Expansion

“In
that
sense,
there’s
nothing
special
about
crypto.
It’s
analogous
to
a
regular
broker-dealer
making
the
market,
posting
a
bid
and
offer
using
software.
We’re
not
trying
to
capture
technology,
but
rather
the
people
who
use
the
technology
for
dealing,”
he
said,
as
quoted
by

DL
News.

To
some
extent,
the
fact
that
the
SEC
explicitly
names
crypto
in
its
public
communications
is
cause
for
genuine
alarm.
But
the
bill
itself
was
not
written
in
an
attempt
to
blow
up
the
industry,
and
there’s
reason
enough
to
think
that
by
including
crypto
the
SEC
is
only
trying
to
be
internally
consistent.
It
said
it
considered
a
crypto
carve-out
but
decided
that
would
have

“negative
competitive
effects”
by
giving
crypto
firms
an
unfair
advantage
over
those
who
have
to
register.

It
may
not
make
sense
to
ask
decentralized
wallets,
exchanges
or
lending
protocols
—
all
technologies
coded
to
remove
human
overseers
from
the
equation
—
to
register,
but
to
the
extent
that
DEXs
are
used
to
facilitate
market
making,
then
they
might
meet
the
SEC’s
broader
definition
for
a
broker.
Others
have
argued
that
AMMs
aren’t
a
match,
because
they’re
just
software
that
facilitates
trading
and
its
an
algorithm
that
matches
buyers
and
sellers.

But
none
of
this
should
matter,
theoretically.
At
the
end
of
the
day,
if
these
applications
are
truly
decentralized,
then
there
really
isn’t
any
way
for
them
to
comply
with
the
rule
or
a
way
for
the
SEC
to
punish
the
protocols
for
noncompliance.
Should
the
agency
think
through
the
implications
and
suggest
a
“discernible
path
to
compliance
for
DeFi
market
participants,”
as
the
DeFi
Education
Fund

wrote
in
its
missive.
Yes.

See
also:


Crypto
Doesn’t
Need
More
Guidance,
SEC
Chair
Gensler
Says

But
you
have
to
ask,
is
it
really
an
imposition
if
the
obligation
cannot
even
be
satisfied?