SEC Commissioner Criticizes New Exchange Act Targeting DeFi

U.S. Securities and Exchange Commission commissioner Hester Peirce has criticized the regulator for its new rules that seek to amend the definition of “exchange.”

In an April 14 statement, Peirce criticized the proposal and SEC’s current leadership, saying the “Commission aggressively expands its regulatory reach to solve problems that do not exist.”

“Rather than embracing the promise of new technology as we have done in the past, here we propose to embrace stagnation, force centralization, urge expatriation, and welcome extinction of new technology.”

The SEC Proposal

The SEC decided to reopen the comment period for amendments to Exchange Act Rule 3b-16 Regarding the Definition of “Exchange.” The decision comes after several crypto firms questioned the amendments.

With the amendment, decentralized platforms will be subject to SEC control. The plan was first proposed in January 2022 and notably proposed that exchanges now include platforms that use “communication protocols.” At the time, the ambiguity of the term was a source of concern for many.

Meanwhile, SEC Chair Gary Gensler believes the existing definition of exchange already covers many crypto platforms, including those claiming to be decentralized.

What Commissioner Peirce Thinks

In her statement, the SEC commissioner noted that the regulator failed to define a “Communication Protocol System.” Instead, SEC asked commenters if they wanted more examples and what type of examples they wanted.

Furthermore, Peirce believes the SEC used the term without considering the impact it could have on hundreds of systems and the potential market disruption. 

Additionally, she wrote that the proposal imposes impractical standards for decentralized activity and those involved. 

While the Exchange Act defines an exchange as “an organization, association, or group of persons,” the definition struggles to apply to DeFi, where the marketplace is software, and participants may not know each other.

Peirce noted that the SEC failed to consider whether compliance is possible before making these rules. She added that this suggests an attempt to regulate decentralized finance into nonexistence.

Peirce said, “rather than [the SEC] responding to commenters’ serious concerns about the breadth, ambiguity, unworkability, and potential disruption of the proposal, the reopener, with few exceptions, doubles down on the defects identified by commenters.”

Several crypto stakeholders praised Peirce’s statement for addressing the financial regulator’s increased scrutiny of crypto. The SEC has been heavily criticized for its “regulation-by-enforcement” approach toward the industry.