On January 26, 2022, the SEC released a rulemaking proposal intended to enhance investor protections and cybersecurity for alternative trading systems that trade treasuries and other government securities.[1] The 650 page proposal contains over 220 separate requests for comments (with many requests containing multiple sub-parts). The comment requests address wide-ranging issues which affect trading venues of all types. Most relevant for the blockchain industry is that the SEC proposal seeks to regulate “communication protocol systems.”[2]
While the regulation never mentions the terms “blockchain,” “cryptocurrency,” or even “token,” there is industry concern that broadly used term “communications protocol systems” may apply to blockchain and cryptocurrency trading platforms. This could include wallets, block explorers that allow users to call smart contracts, and other market participants—if not virtually every blockchain-based application. SEC Chair Gary Gensler notably commented in conjunction with the new SEC proposal that it “ . . . modernizes the rules related to the definition of an exchange to cover platforms for all kinds of asset classes that bring together buyers and sellers.” [3]
SEC Commissioner Hester Peirce criticized the proposal for not allowing an adequate comment period the SEC typically provides:[4]
Notwithstanding the literal and figurative bulk of this release, the Commission has determined that it is appropriate to provide the public with 30 days to read, understand, consider, consult, identify, model, assess, and discuss these rules and how they are likely to affect trading venues for every type of security that is traded in our markets. . . .
Ninety days would have been a reasonable period, given the breadth of issues and the potential effects of the proposed rule. Any shorter period would not be sufficient to give me the confidence that the Commission was receiving sufficient public analysis and comment to enable us to proceed to adoption in a manner consistent with our responsibilities to the market, to the law, or to the American people.
Despite Commissioner Peirce’s dissent, blockchain industry participants, trading platforms or otherwise, will have only 30 days from January 26, 2022 to comment on the new SEC proposed rules. This unusually short comment period for what is a significant SEC industry regulatory proposal reflects the speed at which all things blockchain are moving. The SEC’s swiftness also reflects a continued effort to secure jurisdictional authority as a regulator of decentralized finance. Challenges to the proposed rulemaking are to be expected.
FOOTNOTES
[1] [Press Release] SEC Proposes Amendments to Include Significant Treasury Markets Platforms Within Regulation ATS (Jan. 26, 2022)
[2] [Proposed Rule] Amendments to Exchange Act Rule 3b-16 Regarding the Definition of “Exchange”. . . (Jan. 26, 2022)
[3] Chair Gensler, Statement on Government Securities Alternative Trading Systems (Jan. 26, 2022)
[4] Commissioner Peirce, Dissenting Statement on the Proposal to Amend Regulation ATS (Jan. 26, 2022)