The United States Securities and Exchange Commission (SEC) has recently implemented new rules that will require a larger number of market participants to register with the SEC, join a self-regulatory organization, and comply with federal securities laws and regulations. These rules have the potential to bring crypto and decentralized finance under increased oversight.
The newly adopted rules, which consist of a 247-page document, were initially proposed in 2022. They redefine the terms “dealer” and “government securities dealer” in the Securities Act Rules, as well as the phrase “as a part of a regular business” as used in the Securities Exchange Act of 1934.
These rules will be applicable to market participants who play significant roles in providing liquidity to the markets. According to the new definitions, a dealer may be someone who shows trading interest at or near the best available prices on both sides of the market for the same security, or someone who earns revenue primarily by capturing bid-ask spreads or incentives offered by trading venues for liquidity-providing trading interest. SEC Chair Gary Gensler expressed his thoughts on the matter, stating:
“The new rules establish a lower threshold for the application of these rules. Dealers must have or control $50 million to be subject to them.”
The rules were adopted through a party-line vote, with the two Republican SEC members voting against them. The initial proposed rule, which was 194 pages long, did not explicitly mention crypto except for one footnote. However, it received objections from the crypto industry and pro-crypto politicians. In response, the final rule includes an entire section dedicated to crypto. It states:
“Four out of the five SEC members have released statements regarding the rule change. Republican Mark Uyeda criticized the rule change as overreach, stating, ‘Today’s action solidifies the Commission’s perspective that the definition of a “dealer” is virtually limitless. The public should be concerned about the extensive jurisdiction claimed here.’ Hester Peirce, the other Republican SEC member, did not release a statement.”
Commissioner Caroline Crenshaw expressed her support for the changes, highlighting the existence of a clear loophole where market participants with a significant share of market volume engage in activities similar to those performed by dealers without being registered as such.
The new rules will come into effect 60 days after they are published in the Federal Register.