SEC redefinition of ‘dealer’ would expand its oversight of crypto, DeFi

The United States Securities and Exchange Commission (SEC) adopted rules on Feb. 6 that would require more market participants to register with it, join a self-regulatory organization and comply with federal securities laws and regulations. The new rules could bring crypto and decentralized finance into greater oversight. 

The new rules, the text of which runs 247 pages, were proposed in 2022. They redefine “dealer” and “government securities dealer” in the Securities Act Rules, as well as the phrase “as a part of a regular business,” as it is used in the Securities Exchange Act of 1934.

The rules would apply to market participants “who take on significant liquidity-providing roles in the markets.” Specifically, a dealer under the new definitions might express “trading interest that is at or near the best available prices on both sides of the market for the same security” or earn revenue “primarily from capturing bid-ask spreads, by buying at the bid and selling at the offer, or from capturing any incentives offered by trading venues to liquidity- supplying trading interest.” SEC Chairman Gary Gensler said in a statement:

“These measures are common sense. […] Absent an exemption or exception, if anyone trades in a manner consistent with de facto market making, it must register with us as a dealer – consistent with Congress’s intent.”

There is a lower limit on the application of the new rules. Dealers must have or control $50 million to be liable to it.

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The rules were adopted in a party-line vote, with the two Republican SEC members voting against them. The 2022 proposed rule, which was 194 pages long, did not mention crypto except in one footnote. Nonetheless, it was met with objections from the crypto industry and pro-crypto politicians. The final rule devotes an entire section to crypto. It stated:

“The dealer framework is a functional analysis based on the securities trading activities undertaken by a person, not the type of security being traded.”

Four of the five SEC members released statements on the rule change. Republican Mark Uyeda said the rule change was overreach and, “Today’s action codifies the Commission’s view that the “dealer” definition is practically limitless. The public should be concerned about the immense scope of this claimed jurisdiction.” Hester Peirce, the other Republic on the SEC, did not release a statement.

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Commissioner Caroline Crenshaw said in support of the changes, “There is a clear loophole here: market participants with a significant share of market volume are engaging in activities like those performed by dealers, without being registered as dealers.”

The rules will go into effect 60 days after their publication in the Federal Register.

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