The U.S. Securities and Exchange Commission (SEC) recently reopened its proposal to expand the statutory definition of “exchange” to specifically encompass trading systems that trade crypto assets, including decentralized trading platforms.  As the leading voice for the digital asset and blockchain industry, the Chamber of Digital Commerce submitted a comment letter in response to questions raised in the reopening release. Our goal is to ensure that any final rules the SEC adopts specifically account for the unique attributes of blockchain technology and digital assets.

In our comment letter, we highlight the fact that the reopening release continues the SEC’s ill-fated attempt to regulate the activities of a disparate and dynamic group of persons from around the world utilizing open-source software, known as “automated market maker” (“AMM”) smart contracts, as a single securities intermediary.  The SEC’s proposed approach to include AMM software within the scope of these regulations without further consideration will deter innovation and disrupt the development and adoption of these technologies.

Our letter also points out that the Commission should identify specific crypto assets that it believes are securities as one component of any of AMM software regulation. This would allow users of these systems that engage in transactions in crypto assets to better understand when such transactions might trigger obligations under U.S. securities laws.  The vague language the SEC proposed could create uncertainty and confusion for industry participants, from software developers to DeFi protocol users.

The SEC’s economic cost analysis set out in the reopening release elicited many questions from a broad range of industry stakeholders. Indeed, the SEC itself acknowledges the possibility of decreased innovation due to uncertainty and compliance costs. We believe that the Commission’s economic assessment of the impact of the proposed rules on crypto trading platforms, and particularly on decentralized trading platforms, is clearly not based on accurate or reliable data and woefully underestimates the actual economic cost that the proposed rules would have on decentralized trading systems. In our view and the view of many others, a comprehensive and accurate economic analysis is a fundamental obligation for every SEC rule-making process and the SEC should be prohibited from adopting rules in cases where it fails to meet that burden.

The Chamber’s comment letter reflects our foundational desire for regulatory certainty and clear compliance standards that are appropriate for the nature of digital assets and blockchain technology, their benefits to users, and the potential risks they may present.  We believe in striking a delicate balance between prudent regulation and fostering innovation. The Chamber remains hopeful for further amendments to the proposed rules that encourage both consumer protection and technological progress, creating a sustainable roadmap for our industry.