Oct. 14, 2023
Thank you for the opportunity to comment on the proposed rule attempting to clarify and define exchanges. While I appreciated the intent the SEC may cause undue harm to retail and the Asset Class of cryptocurrency as a whole in the USA and around the world. The SEC must be careful and work with Congress and the Crypto Industry to understand Crypto and it's Exchanges. Arguments on DEX (Decentralized Exchanges) Classification Here are some potential arguments for why decentralized exchanges (DEXs) may not fall under the SEC's definition of exchanges or alternative trading systems: - DEXs operate with no central party or entity in control. Instead, they rely on smart contracts and blockchain technology to enable peer-to-peer trading. This is fundamentally different from traditional exchanges which have central authorities. - DEXs do not bring together orders or set rules for order interaction. The protocols have fixed, deterministic rules encoded. But the DEX itself is not actively matching or crossing orders. Trades occur through user interactions with the protocol. - DEXs do not require users to deposit assets. Trades occur directly between user wallets through smart contracts. This contrasts with ATSs which require central custody of assets. - There is no central party charging fees on trades. Fees are paid to blockchain miners and node operators to validate transactions. The DEX itself does not collect fees. - Most DEXs are non-custodial and do not take possession of user assets at any point. Without custody, DEXs do not have the same oversight obligations as custodial exchanges or ATSs. - DEX trading volumes and liquidity have historically been very low compared to centralized platforms. This may allow them to qualify for lighter regulatory treatment. - DEXs facilitate trading but do not actively find counterparties or set execution prices. The protocols are passive systems for trade execution rather than active matchmaking. Overall, while the SEC could argue DEXs functionally resemble exchanges, counterarguments could be made that DEXs do not neatly fit regulatory definitions of exchanges or ATSs given their technical decentralization and passive trade execution via blockchain protocols. But regulatory treatment remains a gray area. Negative Impact of Rule Changes without definition Here are just some of the negative impacts if the SEC attempts to make rule changes or apply securities regulations to cryptocurrency exchanges before clearly defining these exchanges and digital assets: Regulatory uncertainty - Hasty rulemaking without properly defining terms and asset classifications first may create significant regulatory uncertainty in the crypto industry. This stifles innovation and makes it difficult for exchanges to comply. Stunted growth - Unclear or restrictive regulations on cryptocurrency exchanges could hamper adoption and growth in the space. This negatively impacts investment and innovation. Migration offshore - Exchanges may choose to move offshore to more crypto-friendly jurisdictions to avoid ambiguous US regulations. This could reduce US influence and oversight of the industry. Decreased competition - Regulatory burdens may act as barriers to entry, reducing competition among US-based exchanges and giving large players an advantage. This could lead to decreased innovation. Challenges defining assets - Attempting to classify cryptocurrencies as securities without clear definitions could result in assets being misclassified. This creates confusion and legal risks. Reduction in consumer choice - If exchanges decide to delist assets designated securities or shut down operations due to compliance issues, it reduces options for traders. SEC overreach - The SEC may see heightened scrutiny and legal challenges if they are perceived to be overstepping their authority into an ambiguous area without Congressional direction. Overall the SEC would benefit from taking a measured approach, working with the crypto industry to define clear taxonomies and frameworks, before making substantial regulatory changes governing exchanges and assets. Hasty unilateral action creates unnecessary risks and uncertainties. Specific Risks for the SEC There are a few potential dangers if the SEC oversteps its authority and attempts to regulate cryptocurrency exchanges without Congressional direction: - Regulatory uncertainty - The SEC creating ad-hoc rules without legislation could lead to significant uncertainty in the crypto industry about what is permitted and how to comply. This stifles innovation. - Legal challenges - The SEC risks having their authority challenged in court if they are seen as acting beyond their mandated powers. Court battles could lead to rules being overturned. - Hindering growth - Unclear or excessive regulation of crypto exchanges could drive activity offshore or underground, hindering adoption and growth of blockchain technology. - Hurting innovation - By not properly defining digital asset classes, the SEC risks mislabeling tokens as securities when they have substantial utility. This could limit the development of new crypto economic models. - Discouraging participation - Ambiguous regulations could discourage mainstream financial services participation in crypto, depriving markets of institutional capital. - Consumer harm - If exchanges are forced offshore, US consumers lose protections offered by properly overseen US exchanges. There is also greater risk of hacks, fraud, and loss of funds. - Reputation damage - The SEC blurring lines between legislative and executive functions could undermine its reputation as a rules-based regulator and open it to accusations of overreach. - Congressional pushback - Attempting to regulate without direction may prompt Congress to react by proposing legislation limiting the SEC's role in crypto oversight. Overall the risks of creating regulatory confusion, stifling innovation, and exceeding its authority mean the SEC should exercise prudence and seek Congressional guidance before making major policy moves on crypto markets. Once again, while I understand the intent of purposed rule changes, as written they cause more harm to the public and introduce more risk. The United States will in my opionion miss out on the promise, efficiency, capital and economic freedom inherent in Digital Asset Technology. Companies will continue to offshore and Capital will leave the jurisdiction of the SEC and USA if clear guidance is not given. Congress, the crypto industry, the public should be involved, not just the SEC. Tax Revenue will be lost and America and its citizens will loose the ability to have a leadership role in Crypto Technology. Sent with Proton Mail secure email.