The SEC's New Proposal to Redefine the Term 'Dealer' Could Be Harmful to DeFi

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Although the 200-page plan is ostensibly about electronic trading of US Treasurys, many industry insiders believe it is a covert attack against cryptocurrency.

The Securities and Exchange Commission (SEC) has proposed redefining what it means to be a securities dealer, a move that industry insiders believe will damage the decentralized finance (DeFi) business.

The proposal would broaden the definition of "dealer" to include individuals and firms who execute deals and supply market liquidity using automated and algorithmic trading technology.

While the proposal is purportedly intended at electronic dealers of US Treasurys — an issue the SEC has been grappling with since at least 2014 – a footnote buried in the 200-page text states that the new rule would also apply to digital assets that have been considered securities.

Against Twitter, cryptocurrency attorneys raised the alarm, calling the proposal a "all-out shadow attack on decentralized finance."

If the plan is passed and the law is applied, it might "destroy the tech," according to Gabriel Shapiro, general counsel of crypto research firm Delphi Digital.

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

Any decentralized exchange that meets the proposal's new standards but does not register with the SEC, Shapiro argues, will be labeled as unregistered dealers, which is a felony under securities law.
Assault by surprise

Some lawyers have seen the inclusion of crypto as a single footnote in the huge plan as an intentional attempt to cause confusion and doubt to the crypto markets.

Efforts to bring regulatory clarity to the market have faltered, leaving the SEC to rely on enforcement to govern the industry.

"We wouldn't have to guess at the SEC's intent or underlying intentions in a healthy rulemaking process," Jake Chervinsky, head of policy at the Blockchain Association, tweeted.
Come in and sign up?

Many industry participants, including large exchanges like Coinbase, have attempted to remain compliant but have been faced with ambiguous requests from SEC Chairman Gary Gensler and his staff to "come in and register" with the SEC.

However, Monday's proposal is being slammed as proof that the SEC's offer was never serious.

"This is an example of the Commission's 'come in and register' facade's poor faith over the last few years," crypto lawyer Collins Belton tweeted.

On Twitter, Shapiro stated, "The SEC has [zero] interest in DeFi participants 'coming in and registering." "It's not a registration requirement; it's a ban."

Great thread from @lex_node QTing another great post from @jchervinsky. Def. agree with Gabe's conclusion that this is an indicator of the bad faith entailed in the Commission's "come in and register" facade over the past few years. https://t.co/kudhXMvr0e
— Collins Belton (@collins_belton) March 28, 2022

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