The United States Securities and Exchange Commission (SEC) has recently implemented new regulations on Feb. 6 that redefine the terms “dealer” and “government securities dealer.” These rules, which were initially proposed in 2022, impose registration requirements, self-regulatory organization membership, and compliance with federal securities laws on a larger number of participants in the crypto market.
However, these new rules have faced significant backlash from the crypto community, the decentralized finance (DeFi) ecosystem, and pro-crypto politicians. Since the rules were first proposed two years ago, the crypto community has been protesting, primarily due to the lack of clarity surrounding the definition of crypto securities.
Much of the criticism revolves around the definition of a dealer, as it could compel liquidity providers to register as securities dealers. Consequently, any liquidity provider that controls over $50 million in capital would be obligated to register with the SEC.
In an official statement, SEC Commissioner Hester Pierce expressed her inability to support the final rule, as she believed the definition of a dealer to be “inconsistent with the statutory framework” and likely to distort market behavior, degrade market quality, and turn traders into dealers, many of whom are customers.
Many DeFi supporters and crypto experts have taken to social media to voice their concerns about the new regulations. Gabriel Shapiro, general counsel at Delphi Labs, summarized the conversation between Pierce and SEC staff regarding the dealer registration requirements, explaining how these new rules would impact liquidity providers.
To gain further insight, Cointelegraph reached out to Shapiro to determine whether all liquidity providers with $50 million in assets under management (AUM) would be classified as securities dealers. He clarified that not all liquidity providers would be considered dealers, as it would depend on whether the tokens in the pool are securities or if the trades conducted through the pool are securities transactions.
Bill Hughes, the senior counsel and director of global regulatory matters at Consensys, stated that the new rule emphasizes the need for clear and lasting clarity on the classification of crypto assets as securities under U.S. law. He also anticipates that these new rules on crypto will be legally contested in federal court, as they have a significant impact on the securities markets.
As mentioned by Hughes, the SEC has faced legal challenges in response to its actions against crypto companies. Ripple, Grayscale, and most recently, Coinbase, have all disputed the SEC’s actions in court. Crypto advocates have also criticized the SEC for its failure to provide clear regulations on crypto, despite years of demand from the community and policymakers. Experts now believe that the recent focus on liquidity providers in the rule-making process may also be subject to judicial review.
Overall, it is evident that the SEC’s new regulations have generated controversy within the crypto community and are likely to face legal scrutiny in the future.