DeFi liquidity providers may find themselves encompassed by the new regulations on dealers
The U.S. Securities and Exchange Commission (SEC) has recently implemented more stringent compliance regulations for large capital investors in the Treasury Markets. However, some of these rules seem to have an impact on users of decentralized finance (DeFi).
On February 6, the SEC officially adopted two rules that require market participants engaged in significant liquidity-providing activities to register with the SEC and become members of a self-regulatory organization. This ensures that they comply with regulatory obligations and federal financial laws.
These rules, which were initially proposed in March 2022 to enhance the safety of the Treasury market, also have provisions that pertain to crypto asset securities. If these regulations are enforced, DeFi investors who provide liquidity of over $50 million to automated market makers like Uniswap will fall under the supervision of the SEC.
The SEC’s decision on these rules was settled by a 3-2 vote. Commissioner Hester Peirce and Mark Uyeda opposed the proposal, while Commissioners Gary Gensler, Caroline Crenshaw, and Jaime Lizarraga supported it.
Crypto advocates, including the Blockchain Association and the DeFi Education Fund, expressed their opposition to these policies in comment letters when the rules were initially introduced. Miller Whitehouse Levine, the CEO of the DeFi Education Fund, argued that the expanded definition of a market dealer was too vague and failed to address several concerns related to DeFi protocols.
Commissioner Peirce raised questions about how an automated market maker (AMM), which is essentially software, could register with the SEC, and how many firms would be affected by the new rules. Haoxiang Zhu, the SEC’s director for the trading and markets division, clarified that the proposal was aimed at individuals utilizing decentralized software rather than targeting the technology itself.
Zhu also explained that the lack of comprehensive information and widespread non-compliance among DeFi participants made it challenging to identify the specific individuals who would be impacted by these regulations.
