Dear Ms. Countryman:
I am writing with deep concern about the SEC’s proposal to expand its definition of an “exchange” and an “alternative trading system” (ATS). As written, the proposed rulemaking does not clarify what additional trading systems or protocols the SEC intends to regulate under the expanded definitions. Since existing SEC rules and regulations applicable to exchanges and ATSs are essentially designed to regulate stock exchanges, this ambiguity causes grave concern. It is also completely unclear how any trading system or protocol not already regulated by the SEC could possibly comply with the rules designed for exchanges and ATSs. That the Commission felt the need to clarify the expanded definition would not capture platforms like web chat platforms and utilities exemplifies the problem: if the expanded definition of a securities exchange could be interpreted to capture such software, what software couldn’t be?
Accordingly, it seems obvious to me that this proposed rulemaking will be unable to accomplish successfully any of the SEC’s policy objectives. The severe regulatory uncertainty this rule would create would not enhance oversight, nor would it improve regulatory outcomes; instead, it would stifle innovation, entrench existing businesses and business models, and harm the U.S. public, who might otherwise have benefited from a flourishing and competitive market ecosystem.
Consider how such regulatory uncertainty could affect trading software. First of all, does the proposed rule apply to trading software at all, and if so, to which types of trading software? Would individual developers be required to register as an exchange or ATS solely because they contributed discrete lines of code to a broader tool that could possibly be used to help buyers and sellers interact? Must software developers now consider themselves responsible for trading activity that occurs completely without their involvement?
These are questions that market participants will be compelled to ask, and to which neither they nor any policy maker will be able to provide answers. It is imperative that the SEC clearly define what it does and does not intend to newly capture with this rulemaking. And unfortunately, the SEC did not.
Nowhere else is the inappropriateness of this regulatory ambiguity more pointed and punishing than in the realm of decentralized finance (DeFi). Within DeFi, parties transact using open-source software. DeFi software is often built by multiple parties; one developer may create only a single part of the ultimate protocol, and developers have no ongoing oversight or control over either the further development of that protocol or its operation. It would not simply be difficult and nonsensical for such a developer to fulfill the supervisory responsibilities for trading activity that the SEC requires of an exchange; it would be impossible.
That means the expanded definition in the proposed rulemaking would have but one inevitable outcome: developers would have to second-guess—at the very least—contributing to these kinds of open-source projects. Of course, without these contributors, these open-source projects cannot develop—at least not in the United States. This is a clear example of the chilling effect of the regulatory uncertainty the Commission would create with this rule.
Merely making software available to the public should not be captured under the SEC’s exchange or ATS registration framework, and the SEC should clearly state that.
As a policy matter, SEC regulations should not prohibit the public from benefiting from innovations in financial markets. While relatively new, DeFi protocols have already provided significant benefits and innovations, like offering people the security and transparency of blockchains in an accessible, nondiscriminatory, democratic way. Moving forward with this proposal as written would create a regulatory advantage for incumbents in traditional finance. What’s more, it would cede the future of these DeFi markets to other countries—including significant competitors to the United States who are already seeking to create more attractive regulatory regimes for open-source financial software development.
Consequently, I strongly oppose the SEC’s unacceptably broad proposal to expand its definition of an “exchange” and an “ATS,” and I emphatically urge the SEC to reconsider. At a minimum, the SEC should issue a new proposal that makes clear exactly which trading systems and protocols the SEC intends to regulate. Furthermore, this new proposal should have a robust cost-benefit analysis and comment period. Finally, this new proposal should provide the public adequate time to respond—rather than the, as Commissioner Peirce called it, “unconscionably reckless” 30-day period allotted for responses to this incredibly complex proposal. The SEC should understand that any proposed rulemaking that is 654 pages long and contains more than 220 separate requests for comment on a variety of issues requires more than 30 days to study and analyze.
For all of these reasons, the SEC I stand opposed to the SEC’s proposal, and respectfully request that the SEC take actions to rectify what I consider to be a grave mistake.
Sincerely,