SEC’s Expanded Oversight of Crypto and DeFi: Redefining ‘Dealer’

The United States Securities and Exchange Commission (SEC) has recently implemented new rules that require more market participants to be registered with it, join a self-regulatory organization, and comply with federal securities laws and regulations. These rules, which span across 247 pages, were proposed in 2022 and aim to redefine certain terms such as “dealer” and “government securities dealer” in the Securities Act Rules. The rules seek to clarify the phrase “as a part of a regular business” as used in the Securities Exchange Act of 1934. The goal of these rules is to bring greater oversight to the crypto and decentralized finance sectors.

According to the new definitions, these rules will apply to market participants who hold significant roles in providing liquidity to the markets. For instance, a dealer under these new definitions could be someone who expresses trading interest at or near the best available prices for the same security or earns revenue primarily from capturing bid-ask spreads or incentives offered by trading venues. SEC Chairman Gary Gensler believes that these measures are common sense and align with Congress’s intent. He stated, “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.”

There is a minimum requirement for the rules to apply, which states that dealers must have or control $50 million to fall under regulation. The rules were adopted with a party-line vote, with the two Republican SEC members opposing them. The initial proposed rule in 2022 did not mention crypto, causing concerns and objections from the crypto industry and pro-crypto politicians. The final rule now includes a dedicated section on crypto. It clarifies that the dealer framework is based on analyzing the securities trading activities of a person rather than the type of security being traded.

Statements were released by four out of the five SEC members regarding this rule change. Republican Mark Uyeda argued that this rule change represents an overreach and emphasizes the expansive jurisdiction claimed by the Commission. Commissioner Caroline Crenshaw expressed support for the changes, stating that there is a clear loophole where market participants engage in activities similar to those of dealers without being registered as such. Hester Peirce, the other Republican on the SEC, did not release a statement.

These new rules will take effect 60 days after their publication in the Federal Register, bringing more market participants under SEC oversight and potentially impacting the crypto and decentralized finance sectors.