The SEC Takes on Dealer Definitions

The U.S. Securities and Exchange Commission published a new definition for securities dealers, capturing crypto.

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A dealer by any other name

The narrative

The U.S. Securities and Exchange Commission has put the crypto industry on notice in what may become a whole new front in the sector’s legal war with the agency. When the commission approved its new approach to defining securities dealers last week, it did so with full knowledge that it could shake the foundations of decentralized finance (DeFi).

And the regulator officially didn’t care.

Why it matters

The new rule could be a blow for U.S. DeFi, but it’s more than that. It also suggests the commission’s mindset when it comes to policy that affects crypto, and there’s more of it coming. Around the same time the agency proposed the dealer rule, it also suggested it wanted to overhaul its definition of what makes an exchange. That proposal was clear in its inclusion of crypto platforms in that expanded category, suggesting the agency is trying to formalize oversight of digital assets firms by making them comply with the same rules as all other securities exchanges.

Breaking it down

Deep in the recesses of the actual document behind the SEC’s final rule on what makes a dealer, it outlined how the commission thought for a moment about whether it just ought to carve DeFi out of the new definition, which could otherwise cover some crypto projects with requirements they register and comply with securities laws. The agency noted that industry commenters told the SEC that such compliance could actually be impossible, but the regulator ultimately shrugged.

“If the commission were to revise the final rules to carve out or narrow the application to

market participants who transact in crypto asset securities, that alternative would reduce costs for such market participants,” it noted in the rulemaking document. So, it wouldn’t be fair to everybody else to grant crypto world’s argument, the agency decided in that rulemaking, which was narrowly approved in a 3-2 vote with both Republican commissioners vehemently against the move in their public remarks.

Though cryptocurrency lobbyists have been calling for the U.S. government to produce regulations for years, these SEC efforts aren’t what they had in mind. Beyond the definitions for dealers and exchanges, the agency is also proposing to demand investment advisers only keep their customers’ crypto assets with “qualified custodians.” That’s a term that agency Chair Gary Gensler has argued probably doesn’t include today’s leading platforms.

Both the exchange definition and the custody restrictions are aimed for completion in April, according to the SEC’s public agenda. But that was also the stated timeline of the dealer rule that the regulator already finished, so their clock may be running fast.

If the agency sticks to dismissing arguments from crypto businesses that say they’re being put in impossible positions, the SEC will be approving rules that the firms contend will push them into existential crisis or inability to comply. As a result, the companies will surely keep doing what they’ve been doing: challenging the regulator in court. It’s possible that, beyond the current dispute over what makes a security, the digital assets sector will be arguing in court over what makes an exchange, a dealer and a qualified custodian.

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