Chamber Responds to SEC Proposed Rule Change that Could Have Broad Reaching Implications for the Digital Asset Industry – Calls on Industry to Weigh In

March 29, 2022

The Chamber, along with 22 other signatories, has responded to the SEC’s request for comment on its January 26, 2022 proposed rule change that proposes to expand the definition of  “exchange” to include a range of new market participants that are not currently encompassed by the definition or subject to the associated regulatory obligations.   

In our response letter, we indicate our concerns regarding a number of procedural issues related to the proposed rules including the non-standard time period provided to market participants to comment on the proposals, the lack of a detailed cost-benefit analysis covering the entire range of potentially impacted market participants, and perhaps most concerning, the fact that the vague nature of the term “Communications Protocol System” may be deemed to encompass crypto and DeFi trading platforms without an explicit acknowledgement or discussion of that potential outcome.

Since the proposed rules do not explicitly reference digital assets or crypto or DeFi trading platforms but do describe Communications Protocol Systems as having attributes that might also apply to crypto or DeFi trading platforms, the Chamber is extremely concerned that the proposed rules may represent an indirect effort by the SEC to impose new and significant regulatory obligations on digital asset market participants without a direct and transparent discussion of that potential outcome or the associated costs and benefits.

The Chamber is calling upon all market participants and SEC stakeholders to submit their own comments on the proposed rules. We encourage you to utilize the key points outlined in our letter as a guide for your own response. The comment period deadline is April 18, 2022.      

If you have questions regarding the proposed rule or the Chamber’s comment letter, please contact the Chamber at your earliest convenience.

 

Chamber of Digital Commerce’s ATS Comment Letter Key Points:

Lack of Customary Public Comment Period

  • The Commission has established a public comment period for the Proposals of 30 days from the date of publication in the Federal Register. The Chamber is concerned about the worrying trend around the shortened length of comment periods provided by the Commission around recent significant rulemaking proposals and requests that the Commission extend the time frame for public comment until at least 60 days from publication in the Federal Register.

Introduction of Concept of Communication Protocol Systems and Potential Application to Digital Asset Intermediaries

  • In the Proposals, the Commission introduces the concept of “Communications Protocol Systems,” which “offer the use of protocols and non-firm trading interest to bring together buyers and sellers of securities.”
  • The Proposals also include several examples of Communication Protocol Systems, and note that Communication Protocol Systems perform similar marketplace functions as registered exchanges and ATSs, providing a “market place” for bringing together purchasers and sellers of securities. 
  • The proposed rule changes included in the Proposals, however, fail to include the term Communication Protocol System or a definition of such term. We have significant concern that a lack of a specific definition for such a broadly explained term will cause ongoing confusion and, as a result, increase the potential for a market participant to inadvertently run afoul of the obligations set forth in the Proposals.
  • We also highlight our concern that while the Commission may interpret the definition of “exchange” under the Securities Exchange Act of 1934 (the “Exchange Act”), it does not have discretion to amend that definition, even as it might seek to change the definition in its rules. In addition, we note that if the final rule does not include a requirement that a Communication Protocol System “effect” trades, it would violate the Exchange Act definitions of “exchange”, “broker” and “dealer” and the Commission’s own interpretations of the definitions of “broker” and “dealer” (every ATS must be a registered broker-dealer).
  • We also express our significant concern that the Commission intends that the Proposals encompass stakeholders who may not be readily identified in the Proposals. For example, it is completely unclear whether the Commission proposes that the term Communications Protocol System includes digital asset or cryptocurrency markets since there is no reference to digital assets or cryptocurrency trading platforms anywhere in over 600 pages of regulatory discussion.  
  • We therefore request that the Commission specifically address whether or not the Proposals encompass any digital asset market participants, and, if so, provide examples of the types of digital asset participants that it believes would be required to comply with the proposed rules.

Transition Period Upon Effectiveness of the Proposals  

  • The Proposals currently include a transition period of only 210 days from the date that the proposed rules become effective.
  • We express our significant concern that, should a company that is currently exempt from the definition of “exchange” be deemed to be included in the definition of Communication Protocol System, and thus required to register as an exchange or to comply with Regulation ATS and register as an Alternative Trading System, the proposed 210-day transition period for compliance with the proposed rules is wholly inadequate.

Paperwork Reduction Act

    • To the extent that the Commission’s proposed expansion of the definition of “exchange” to encompass Communication Protocol Systems might be deemed to encompass digital asset trading intermediaries, we have significant concerns regarding the fact that the Paperwork Reduction Act segment of the Proposals provides no analysis of the scope of impacted market participants or the economic burden that would be imposed by the proposed expansion of the definition of “exchange” to include digital asset trading platforms. 
    • The Commission’s failure to provide a specific analysis of the impact of the expansion of the definition of an “exchange” to include digital asset intermediaries which would need to register with FINRA as broker dealers prior to registering to operate an ATS with the Commission, represents a serious procedural flaw that must be rectified before the Proposals move forward to adoption.