Consensys Challenges SEC’s Proposed DeFi Exchange Classification
In a significant move, blockchain technology leader Consensys has formally urged the United States Securities and Exchange Commission (SEC) to reconsider and retract a proposed regulatory change. This amendment aims to redefine the term “exchange” in a manner that could potentially bring decentralized finance (DeFi) protocols under the umbrella of securities exchanges. Consensys has expressed substantial concerns regarding the implications of such a change, emphasizing issues related to regulatory overreach and potential violations of fundamental constitutional principles in the United States.
Consensys Raises Alarm: SEC’s Proposed Rule Could Conflict with U.S. Law
In a detailed letter addressed to the SEC’s crypto task force, led by Commissioner Hester Peirce, William C. Hughes, Senior Counsel at Consensys, articulated a comprehensive critique of the proposed amendment. Hughes presented multiple arguments advocating for the withdrawal of the proposed definition of “exchange” under U.S. securities regulations.
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Hughes argues that the proposed regulatory modification exceeds the legislative intent of the U.S. Congress, which originally defined an “exchange” in the Securities Exchange Act of 1934 as a marketplace for securities trading. Contrary to this definition, the new amendment seeks to encompass DeFi platforms, which are typically passive tools used by traders to arrange and execute transactions.
Additionally, Hughes contends that the proposed change contravenes the Administrative Procedure Act (APA) because the SEC did not adequately address significant public feedback received in 2022. This feedback indicated that decentralized protocols, if classified as exchanges, would struggle to meet the operational requirements imposed by the SEC, suggesting a predetermined agenda to exclude these projects from the U.S. market.
Another crucial point raised by Hughes is the absence of tangible benefits from the proposed changes, aside from expanding the regulatory scope of the SEC. He emphasizes the lack of a comprehensive cost-benefit analysis that accounts for the wide array of blockchain projects impacted by the definition adjustment.
A statement from Consensys highlights the underestimation of affected entities by the amendments, which are expected to impact only 35 to 46 New Rule 3b-16(a) Systems, with 15 to 20 involving digital assets. This figure is deemed vastly understated given the broad and vague scope of the amendments, potentially affecting hundreds, if not thousands, of projects and protocols.
Furthermore, Hughes underscores that the SEC’s proposed amendments infringe upon the First Amendment by attempting to regulate all “communication protocols” between trading parties, irrespective of explicit verbal actions. He also points out the lack of clarity in defining terms such as “communication protocols” and the criteria for determining when a group “brings together” individuals with trading interests, which constitutes a violation of due process under the Fifth Amendment.
Consensys urges the SEC’s crypto task force to thoroughly evaluate these concerns and remove the definition change from the regulatory agenda.
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