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The U.S. Securities and Exchange Commission (SEC) is reopening a proposed regulation from last year, which would expand the definition of the word “exchange” to capture a broader swath of trading activity. It clarifies that decentralized finance (DeFi) platforms would also be subject to the regulator’s oversight. This move is expected to capture many more venues for regulation beyond traditional exchanges that bring together orders from multiple buyers and sellers in a marketplace. SEC officials estimate that about a dozen crypto firms would fall under the expanded definition. SEC Chair Gary Gensler argues that most crypto platforms are already operating as unregistered securities exchanges, with or without the latest tweaks to the definition. The SEC is poised to “reiterate the applicability of existing rules to platforms that trade crypto asset securities, including so-called ‘DeFi’ systems”. In this article, we will explore what this means for the crypto industry and whether DeFi is under threat.

The SEC’s decision to reopen the proposed regulation from last year has raised concerns among DeFi platform users. The SEC plans to expand the definition of an exchange, which will include DeFi platforms, despite criticism from the crypto industry. SEC officials estimate that about a dozen crypto firms would fall under the expanded definition. While the crypto industry has urged the SEC to provide regulatory clarity, the move has provided “very few answers” and likely raised additional questions for the sector.

DeFi-platforms allow users to lend, borrow and save in digital assets, bypassing the traditional gatekeepers of finance such as banks and exchanges. The plan, first proposed in January 2022, would capture many more venues for regulation beyond traditional exchanges that bring together orders from multiple buyers and sellers in a marketplace. The proposal was aimed at Treasury markets and marketplaces for other government securities, where inter-dealer crypto brokers have functioned like exchanges without registering them as such.

SEC Chair Gary Gensler argues that most crypto platforms are already operating as unregistered securities exchanges, with or without the latest tweaks to the definition. He contends that “calling yourself a DeFi platform is not an excuse to defy the securities laws”. However, he and the commission are poised to “reiterate the applicability of existing rules to platforms that trade crypto asset securities, including so-called ‘DeFi’ systems”. This move could be seen as a response to criticism from the crypto industry, which saw the initial proposal as an overreaching power grab that failed to provide enough clarity about its meaning to be legitimate.

DeFi platforms could be hit the hardest by the new regulations, as they operate outside the traditional financial system. This move by the SEC could have a significant impact on the development of DeFi platforms, as they would need to comply with the same regulations as traditional exchanges. DeFi supporters argue that this move is unnecessary and would stifle innovation in the crypto industry.

While the SEC has not yet provided clear definitions and examples in the proposal, SEC officials have said that the agency will evaluate each situation by how the activity is being handled, including whether there’s an intermediary and exactly what service that intermediary is providing. Some DeFi platforms may fall under the proposed definition, but others may already be considered exchanges by the existing one, SEC officials said this week.

In conclusion, the SEC’s decision to expand the definition of an exchange has raised concerns among the crypto industry, especially among DeFi platform users. While the move aims to regulate crypto firms that function like exchanges without registering them as such, it could have a significant impact on the development of DeFi platforms. The crypto industry has urged the SEC to provide regulatory clarity, but the move has provided “very few answers” and likely raised additional questions for the sector.