Oct. 24, 2023
Dear Securities and Exchange Commission, I am writing to provide comments on the proposed rulemaking to amend the definition of "exchange" under the Securities Exchange Act of 1934. While I understand the goal of updating regulations for current market developments, I am concerned the broad scope of trading systems and activities covered in the proposal would inadvertently classify certain decentralized blockchain networks and smart contracts as exchanges when they lack traditional exchange functions. Specifically, the expansive proposed definition of bringing together buyers and sellers could implicate decentralized protocols and smart contracts that have no centralized governance or discretionary control. These open-source smart contracts autonomously facilitate transactions through code rather than active oversight. Treating usage of such smart contracts as triggering exchange registration does not seem proportionate to the limited risks involved. I recommend the SEC narrow the scope of the exchange definition or provide explicit carve-outs for permissionless blockchain networks and smart contract systems that operate autonomously without formal managing entities. These technologies do not have the discretion, influence, or information asymmetry of a traditional exchange and alignment with exchange regulation may hinder software innovation. Appropriately tailored regulation serves to protect investors and maintain market integrity. However, sweeping decentralized networks and smart contracts absent governance into exchange oversight goes beyond the SEC's intent and would stifle financial technology innovation. I urge refining the proposal's scope to avoid inadvertent overreach. There are a few key reasons why decentralized finance (DeFi) platforms on blockchains should not be classified as financial exchanges like eBay or Facebook Marketplace: No central party controls the protocols - DeFi platforms utilize autonomous smart contracts running on public blockchains. There is no centralized authority or intermediary operating the exchange unlike eBay or Facebook. Users maintain custody - In DeFi, users maintain direct custody of their funds in their own wallets. They aren't depositing assets with a central custodian as is the case with centralized exchanges. · Permissionless access - Anyone can access and use DeFi protocols freely without needing approval from a governing entity. Centralized platforms limit participation. · Transparent operations - DeFi platforms have their operating protocols public on the blockchain for full transparency. Centralized platforms have opacity in their operations. · User-driven governance - DeFi platforms allow governance decisions and upgrades to be made by the user community. Centralized exchanges operate top-down. · Immutable protocols - The DeFi protocols on blockchains typically cannot be changed at the discretion of a single party once launched. Overall, the lack of central intermediaries, parties in control, requirements for access, opacity, and top-down governance make DeFi platforms on blockchains fundamentally different from custodial, centralized exchanges. Their decentralized nature provides a rationale for not classifying them as regulated financial exchanges. I hope the SEC strongly reconsiders their stance on this matter. Please feel free to contact me if I can provide any further information. Sent from Proton Mail for iOS