The Securities and Exchange Commission decided to include cryptocurrencies under the rules that mandate market players that play major roles in supplying liquidity to adhere to federal securities laws.

In a meeting on Tuesday, the SEC voted 3-2 to approve the proposal, which made one reference of cryptocurrency in a footnote throughout its proposed 194-page form. With the exception of those with holdings under $50 million, everyone trading in cryptocurrency assets that fit the description of securities or government securities must abide by the 247-page rule that was adopted on Tuesday. The adopted rule indicated that the regulations would impact decentralized financing.

“If a person’s trading activities in crypto asset securities, including products, structures and activities involved in the so-called DeFi market, meet the definition of ‘as part of a regular business’ as set forth in the final rules (i.e., the person engages in a regular pattern of buying and selling crypto asset securities that has the effect of providing liquidity to other market participants as stated in the qualitative standard), and no exception or exclusion applies, that person would be required to register as a dealer or government securities dealer,” according to the regulation.

After the rulemaking was first proposed in March 2022, the cryptocurrency industry resisted the rule in letters of comment to the SEC. Several people commented that the regulation was unfair to DeFi products  products because they do not have a central controlling body and are just software.

In its letter of feedback, the DeFi Education Fund examined the function of automated market makers, referring to them as a “execution protocol.” The fund claims that automated market makers, or AMMs, create a liquidity pool of cryptocurrencies and other digital assets, lock them in a smart contract, and then make trading easier.

Industry Reaction
DeFi Education Fund referred to the rulemaking that was enacted on Tuesday as “misguided and unworkable.”

“While the SEC acknowledged receiving comments discussing DeFi, including our concerns, the SEC not only failed to confront the substance of our concerns but also failed altogether to articulate any discernible path to compliance for DeFi market participants,” Miller Whitehouse-Levine, the company’s CEO, said in “Imposing obligations on entities in the DeFi ecosystem that cannot be complied with is wrong, impractical, and hostile to innovation.”

The Chamber of Digital Commerce’s vice president of policy, Cody Carbone, described Tuesday’s decision as “just another illustration of the SEC’s ongoing animosity towards the digital asset industry.”

“We’re asking additional market participants to register as dealers, abandoning decades of precedent to apply impossible rules on digital asset market participants,” Carbone stated in a statement. “The SEC did not want the digital asset industry’s perspective on this rule, despite its impact, as the 200-page proposed rule only mentioned digital assets in a footnote.”

Commissioner Peirce’s rebuke
Hester Peirce, a Republican commissioner who voted against the rule, resisted some of its provisions at the discussion on Tuesday.

“The release doesn’t spend a lot of time talking about crypto, but does explain that an automated market maker might have to register as a dealer under the final rules,” Peirce stated. “An AMM is, as I understand, is just a software protocol, so how does it register as a dealer?”

In response to Peirce, an SEC official stated that an AMM is more than just software.

Following some back and forth, Peirce inquired as to the number of individuals who would be affected by the law if they posted liquidity in AMM pools.

“This is a market that’s not transparent or compliant, so we don’t really have great data unfortunately,” the securities regulator stated.

“I mean, I think one of the reasons they’re not compliant is because they can’t figure out what our rules are and they can’t even figure out when we think that something is a security,” Peirce replied.

In addition to mentioning the $50 million exception cap, SEC Chair Gary Gensler stated that demand exists in both the cryptocurrency and non-crypto sectors.

Earlier, during the opening remarks, Gensler stated that the regulation should be applied in its entirety to safeguard investors, pointing out that the introduction of electronification and algorithmic trading has caused markets to accelerate. According to him, companies are functioning as “de facto market makers” and are not registered as dealers with the SEC, which would necessitate them to submit data, maintain records, and These precautions seem like common sense to me,” Gensler remarked.

“Regulation and registration requirements should not apply to certain dealers and not to others, as Congress did not intend. A dealer must register if they trade in a way that is compatible with de facto market making, absent an exemption or exception. This is in line with Congress’s intentions and also fairly and evenly distributes the market, Gensler continued.

The Federal Register publication of the final regulations will bring them into force sixty days later. One year from the date the final rules go into effect will be the compliance date.