The SEC's New Proposal to Redefine 'Dealer' Could Spell Bad News for DeFi

The 200-page proposal is ostensibly about the electronic trading of U.S. Treasurys – but many industry insiders smell a sneak attack against crypto.

AccessTimeIconMar 28, 2022 at 9:10 p.m. UTC
Updated May 11, 2023 at 5:12 p.m. UTC

A new proposal by the U.S. Securities and Exchange Commission (SEC) aims to redefine what it means to be a securities dealer – a move industry experts say could cripple the decentralized finance (DeFi) industry.

The proposal would expand the definition of “dealer” to include people and businesses that use automated and algorithmic trading technology to execute trades and provide liquidity in the market.

While the proposal is, at least ostensibly, aimed at electronic traders of U.S. Treasurys – an issue the SEC has been wrestling with since at least 2014 – a footnote buried in the 200-page text says the proposed rule would also apply to digital assets that have been deemed to be securities.

Crypto lawyers have sounded the alarm on Twitter, calling the proposal an “all-out shadow attack on decentralized finance.”

Gabriel Shapiro, general counsel at crypto research firm Delphi Digital, tweeted that if the proposal is accepted and the rule enforced, it could “kill the tech.”

The proposal would bring all automated market makers (AMMs) and liquidity providers with more than $50 million in total assets under management under the SEC’s regulatory umbrella and thus subject to the SEC’s registration requirements – something that would be impossible for many, if not all, decentralized exchanges.

Any decentralized exchange that fits the new criteria under the proposal and that didn’t register with the SEC could then, Shapiro argued, be declared an unregistered dealers, which is a felony offense under securities law.

Sneak attack

The inclusion of crypto as a single footnote in the massive proposal has been seen by some lawyers as a deliberate attempt to add confusion and uncertainty into the crypto markets.

Attempts to bring regulatory clarity to the industry have stalled, leaving the SEC to primarily regulate through enforcement.

“In a healthy rulemaking process, we wouldn’t have to guess at the SEC’s intent or its underlying goals,” Jake Chervinsky, head of policy at the Blockchain Association, tweeted.

Come in and register?

Attempts to remain compliant by many industry participants – including leading exchanges like Coinbase – have been met with vague requests by SEC Chairman Gary Gensler and his staff to “come in and register” with the SEC.

Monday’s proposal, however, is being lambasted as a sign that the SEC’s offer was never genuine.

“This is an indicator of the bad faith entailed in the Commission’s ‘come in and register’ facade over the past few years,” tweeted crypto lawyer Collins Belton.

“The SEC has [zero] interest in DeFi participants ‘coming in & registering’,” Shapiro wrote on Twitter. “It’s a ban, not a registration requirement.”


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Cheyenne Ligon is a CoinDesk news reporter with a focus on crypto regulation and policy. She has no significant crypto holdings.

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