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SEC Faces Storm of Criticism from Crypto Sector, Lawmakers over ‘Exchange’ Re-definition Plans

Tim Alper
Last updated: | 3 min read
Source: AdobeStock / Zacarias da Mata


The United States Securities Exchange Commission (SEC) and its Chairman Gary Gensler have received a slew of letters from pressure groups and parliamentarians voicing their concerns about proposed amendments to the Exchange Act, established in the 1930s. The agency plans to expand the legal definition of what an exchange is.

Patrick McHenry, the ranking member of the House Financial Services Committee, and Bill Huizeng, the ranking member of the subcommittee on Investor Protection, Entrepreneurship and Capital Markets, sent Gensler an open letter complaining that the amendments could stifle innovation in the crypto sector.

Broadening the definition of an exchange would force other players to register with the SEC and other regulators, and could increase the amount of red tape crypto players outside the centralized exchange sphere need to contend with.

McHenry and Huizeng wrote:

“The SEC fails to identify the problem that the rulemakings are intended to solve, particularly as it relates to requiring certain market participants facilitating digital asset transactions to register with the SEC.”

The Washington DC-based crypto think tank Coin Center has previously weighed in on the matter, claiming that the proposed amendments could run counter to the American constitution. The body also warned of the dangers of “an inappropriately broad standard for registration” implicit in the SEC’s proposals.

But the politicians were not alone – over 120 others, ranging from private citizens to major crypto players like ConsenSys, have also written to the SEC about the matter – chiefly to express their displeasure.

Gabriel Shapiro, the General Counsel at the crypto research firm Delphi Digital, claimed that the SEC’s regulations “seek to re-define all ‘communications protocols’ as potential securities exchanges” – and might impact Automated Market Makers (AMMs), liquidity providers for the decentralized finance (DeFi) sector.

ConsenSys, meanwhile, also argued that the proposals risked violating the constitution – in particular the First Amendment. The firm also warned that the suggested new rules could cause more harm than good, explaining:

“A rulemaking that declines to assess whether its benefits are worth its costs is generally arbitrary and capricious, for a regulation that does substantially more harm than good is irrational, and therefore so is the failure to inquire as to the relation of a regulation’s costs to its benefits.”

The venture capital player Andreessen Horowitz’s General Counsel Miles Jennings took to Twitter to share his firm’s own objections to the SEC’s proposals, adding that his letter seeks clarification that the proposal does not apply to DeFi protocols, and asserts that the proposal suffers from significant deficiencies under the Administrative Procedures Act if it does.”

He added:

“We call on the SEC to work within the spirit of the recent Executive Order and constructively engage with Web 3.0 innovators to protect investors and foster innovation in this vitally important technology sector.”

Paul Grewal, the Chief Legal Officer at the crypto exchange heavyweight Coinbase also wrote about his firm’s objection to the proposals on Twitter, urging the SEC to “hit pause and reconsider” instead of “pushing ahead with its proposal.”

He accused the SEC of failing to make its deliberations as part of “an open and transparent process,” adding that “these decisions are too important to be made in a black box.”


Learn more: 
US SEC’s Proposal On ‘Exchange’ Definition Could Be Unconstitutional – Think Tank
United States Crypto Lobbyists Making Inroads at State Level – Report

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