Oct. 15, 2023
Dear SEC, I am writing to provide input on the proposed rule to amend the definition of "exchange" under the Securities Exchange Act of 1934 (File No. S7-02-23). I appreciate the SEC's efforts to adapt regulatory oversight to new technological developments in trading systems. However, I am concerned the expanded definition may inadvertently capture a wide range of activities that were not intended to be regulated as exchanges. In particular, the amended definition referring to systems that "bring together buyers and sellers" and use "non-discretionary methods" could be interpreted extremely broadly. Taken literally, this new language could make any smart contract or protocol that enables peer-to-peer exchange of securities into an exchange subject to registration and regulation as such. This outcome would be detrimental for many reasons: It would impose exchange-level compliance burdens on decentralized and peer-to-peer networks where they are not warranted. It could allow the SEC expansive oversight over transactions occurring outside its jurisdiction. It would stifle software innovation and individual participation in open, transparent blockchain networks. I believe decentralized finance (DeFi) protocols like PulseX should not automatically be classified as regulated exchange platforms. These are open source software systems that enable peer-to-peer exchange of digital assets in a decentralized manner. Rather than assuming all assets traded on DeFi protocols are securities necessitating exchange-level oversight, it may be more appropriate to view these platforms as decentralized data exchangers. The individual users publishing data to a public blockchain are conceptually no different than people exchanging data on the open Internet. Platforms like Facebook Marketplace and eBay enable exchange of data about goods and services without being regulated as financial exchanges. Similarly, decentralized exchanges are merely facilitating peer-to-peer exchange of data representing digital assets and tokenized real-world assets. Imposing stringent exchange requirements on DeFi protocols would stifle software innovation and impose unnecessary burdens. It would be more prudent to first analyze whether specific assets traded on these platforms qualify as securities, and regulate accordingly, rather than assuming all DeFi activity requires exchange-level regulation by default. The free and open exchange of data is a guiding principle of the Internet. Applying this principle to decentralized exchange of tokenized assets through innovative blockchain protocols will support continued growth of decentralized finance in a responsible manner. I urge the SEC to refine the definition and focus any new regulatory authority narrowly on large-scale alternative trading systems that functionally operate like exchanges. Sweeping individual developers and users of open smart contracts for exchanging securities into the definition goes beyond the SEC's intent and would have severe chilling effects. The SEC should be technology-neutral and avoid hindering software innovation that expands access to capital and financial services. I welcome continued discussion to ensure regulatory changes enhance investor protections while supporting permissionless innovation. Thank you for your consideration of this important matter. Sincerely, Damien Todd Wade. Sent from Proton Mail for iOS