Oct. 20, 2023
I am concerned the proposed expansion of the exchange definition under the Securities Exchange Act could inadvertently encompass certain decentralized systems that do not resemble traditional securities exchanges. In particular, decentralized finance (DeFi) platforms built on distributed ledger technology like blockchain and using smart contracts should not automatically be categorized as exchanges simply for enabling peer-to-peer exchange of crypto assets in a programmed manner. My key reasons why DeFi protocols should be excluded are: - DeFi platforms are software programs accessible to anyone globally, not members-only organizations providing a marketplace. - There are no centralized groups or entities controlling order flows or liquidity pools on DeFi platforms. - DeFi enables direct interaction between users and the immutable smart contract code rather than going through intermediaries. - There are no buyers and sellers in the traditional sense when users access smart contract functions for swapping crypto assets in a predetermined way. - Trading on DeFi platforms is not facilitated by market makers, brokers or other financial intermediaries. - As reinforced by SEC vs Ripple Labs, digital assets like cryptocurrencies can fall outside the scope of securities regulations. For example, when a user swaps Bitcoin for Ether through an automated market maker algorithm on a Defi Platform, they are essentially interacting with decentralized software to algorithmically exchange crypto assets according to how the smart contract code is programmed. This does not equate to buying or selling securities on a traditional exchange. In summary, I recommend the SEC carefully scope the exchange definition to avoid unintended consequences for decentralized technologies like blockchain networks and DeFi protocols that do not neatly fit existing regulatory models. More specifically, I urge the SEC to exclude DeFi protocols from the updated exchange definition, as imposing securities oversight on these borderless automated software systems could severely inhibit future software innovation in the United State. Sent with Proton Mail secure email.