Cryptocurrency firms resist proposal to police treasury market

WASHINGTON — The Securities and Exchange Commission’s proposal to make treasury markets more resilient has drawn a backlash from cryptocurrency firms, who say it could increase the legal risks of so-called decentralized finance, or DeFi, platforms.

The rule, proposed by the SEC in January, would expand the agency’s definition of a stock exchange to include a broader set of communication systems that enable potential buyers and sellers of securities to find each other. These entities will have to register with the Securities and Exchange Commission either as NYSE-like exchanges, or as a class of brokers and dealers called alternative trading systems, or ATSs, which perform stock-like functions but face lighter regulations.

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The SEC’s imposed deadline for public comment on the proposal expired last week. The agency’s next step will be to analyze comments from investors, companies and industry groups in the coming months before deciding whether to finalize the rule.

There are many of the biggest opponents of the proposal in the cryptocurrency industry, which is not the intended target of the rule. Companies including the Coinbase Global trading platform company ,

Venture capital firm Andreessen Horowitz and stablecoin issuer Circle Internet Financial Inc. , as well as several pressure groups focused on cryptocurrency, believe that the plan will create more legal uncertainty.

The current definition of an exchange from the SEC includes an entity that matches orders from multiple buyers and sellers, and “uses well-established, non-discretionary methods” to determine how those orders interact with each other. Under the proposal, the definition will replace the word “uses” with “allows” to capture the so-called communication protocol systems that play a more passive role in enabling potential traders to interact, negotiate and reach agreement.

SEC officials say their goal is to censor messaging systems that professional traders use to solicit quotes for Treasury bonds and other fixed-income securities.

These online platforms essentially perform the same function as exchanges but face little or no oversight from regulators. In 2019, Treasurys’ largest online trading platform, BrokerTec, experienced a nearly 90-minute outage on Friday afternoon that could have rocked the broader market if it had occurred at a different time, the Securities and Exchange Commission said.

Coinbase is among the crypto companies that say DeFi platforms face legal risks even though they are not the intended target of the SEC rule.


Shannon Stapleton/Reuters

“I think it is important that we consider revising the SEC’s rules to reflect the increased use of electronic trading platforms in the fixed income markets,” SEC President Gary Gensler said in a speech on Tuesday.

The agency’s nearly 600-page proposal does not refer to cryptocurrency. However, critics say its language could take over DeFi platforms, which allow users to trade cryptocurrencies without a traditional broker.

“The proposal may not have been designed with this ecosystem in mind,” lawyers for Andreessen Horowitz, who invests in crypto projects, wrote in a comment letter to the Securities and Exchange Commission. “However, broadening the definition of an exchange in a way that can apply to DeFi protocols, at a time when it is not clear which digital assets are considered securities, will create enormous regulatory uncertainty and deter responsible innovation.”

An SEC spokesperson said the agency generally responds to feedback it receives as part of final rulemaking rather than in advance. He said the SEC benefits from strong engagement with the public and will review all comments submitted.

In the year he was on the job, Gensler didn’t say much to suggest he would be sympathetic to the concerns of the DeFi industry. He has said repeatedly that any trading platform that lists securities must register with the Securities and Exchange Commission unless it meets the exemption. Gensler also noted that despite their marketing claims, DeFi platforms still typically rely on humans to write software and make governance decisions.

WSJ’s Dion Rabouin explains why Wall Street is now betting so heavily on cryptocurrencies and what this means for the new asset class and its future. Composite photo: Elizabeth Smiloff

Cryptocurrency advocates say that DeFi is often the work of multiple developers, who may or may not remain involved after contributing. They say requiring them to register with the Securities and Exchange Commission and abide by its rules would be difficult or impossible.

The SEC received 170 identical comment letters copied and pasted from a website,, promoted on Twitter by a group called the DeFi Education Fund. “Merely making software available to the public should not be captured under the securities exchange or ATS registration framework, and the SEC should make this clear,” the letter read.

The DeFi Education Fund is financially backed by Uniswap, the largest DeFi platform.

The Wall Street Journal reported last fall that the Securities and Exchange Commission was investigating the platform’s lead developer, Uniswap Labs. Earlier this month, attorneys for the plaintiffs also filed a class action lawsuit against Uniswap and its backers alleging that they illegally promoted, offered and sold unregistered securities.

Under federal law, anyone who purchases an unregistered security can sue the seller for a refund.

A Uniswap Labs spokeswoman said the plaintiffs’ allegations were unfounded and the group plans to aggressively defend against the lawsuit.

Representatives of asset managers and broker-dealers also raised concerns about the proposal, saying the new language could have far-reaching consequences for their businesses.

“The broad concept of communication protocol systems can theoretically capture hundreds, if not thousands, of systems across asset classes,” the Securities Industry and Financial Markets Association, which represents brokers and dealers, said in a comment letter dated April 18. The Securities and Exchange Commission estimates that 22 of the purported communication protocol systems will be subject to the new rule.

write to Paul Kiernan at

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