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Is SEC Proposal Really a ‘Trojan Horse’ for Regulating Crypto Sector?

While major cryptocurrencies rebounded after a volatile week, Securities Exchange Commission (SEC) watchdogs continue to push for regulating the crypto sector.

Last week, the SEC unveiled a 654-page plan aimed at regulating “treasury markets platforms”. But some industry insiders say that it’s actually “sweeping crypto regulation in disguise”. The proposal does not mention crypto specifically, but new rules would allow regulators to probe decentralized finance (DeFi) protocols and crypto platforms.

Under the new proposal, the definition of what a security is would be expanded. It would also eliminate exemptions for systems that bring together sellers and buyers of securities. Currently, these Alternative Trading Systems (ATS) are not governed by the SEC. In short – the SEC is attempting to claim regulatory turf over platforms that, historically, have been outside their jurisdiction.

The actions of the SEC, and the contents of their proposal, are now being called a Trojan Horse for crypto regulation. SEC Chair Gary Gensler is supportive of regulating all things crypto, but using a proposal of this kind to introduce regulation seems to undermine the efforts of lawmakers and regulatory agencies currently discussing regulation options.

In fact, Pro-crypto Commissioner Hester Peirce believes the proposal is a backdoor way of reining in crypto. She says,

“The expansive definition that’s being proposed for exchanges will cover a lot of potential platforms that haven’t thought necessarily that they would be covered and that’s in the traditional security space, as well as in the crypto space.”

Crypto Sector to Comment on Proposed Plan

Some believe that the SEC proposal is a means of closing regulatory gaps. Others believe that it is a way for the SEC to gain more control and regulation of the crypto sector without saying as much.

The SEC has given the crypto sector, including Blockchain insiders, trading platforms and other stakeholders 30 days to comment on their proposed plan. Commissioner Peirce believes that this timeframe is too short for such a significant proposal. After all, it is 654 pages to disseminate. The swiftness may suggest that regulators are “…itching to tighten the grip on the exploding decentralized finance market.”

Once the commenting period is over, the SEC will hold a vote to reach a final decision. If the proposal passes, the amendments could give the SEC powers to regulate DeFi platforms and the crypto sector. 

Advocates Become Fearful of Possible Regulation

Cryptocurrency platforms are responding to the SEC’s proposal with uncertainty and fear about possible regulation from the SEC. Currently, crypto is outside the SEC’s supervision, but the new proposal could change that.

Crypto sector advocates say the rules could affect a lot of platforms and participants in the digital asset sector. And advocates are starting to speak up about their concerns over SEC regulation. The Association for Digital Asset Markets (ADAM) is one trade group speaking up. In a public comment, ADAM says that the proposal could expand SEC oversight of decentralized networks “…in ways not publicly mentioned or discussed.” ADAM requested the comment period be extended to 60 days.

So far, the SEC has not responded or extended the deadline. Meanwhile, crypto advocates continue to question exactly how the proposal could affect the industry. 

Patrick Daugherty who is a partner at Foley and Lardner is leader of their Blockchain taskforce. He calls the SECs proposal a “stealth rulemaking proposal.” He also believes the SEC is using “undue haste” by allowing only a 30-day window for commenting on the proposal. He goes further saying,

“It’s a ‘stealth’ proposal because the words ‘crypto’ and ‘digital’ do not appear in the SEC’s 654-page release, but the SEC is plainly aiming at systems (both centralized and decentralized) whose protocols aggregate indications of interest for buying and selling crypto assets, which its chair and its Division of Enforcement (not necessarily federal judges or juries) are eager to classify as ‘securities’ exchanges.”

Crypto Sector and Advocates Keeping Watchful Eye

Participants in the crypto sector and crypto advocates are keeping a watchful eye on the status of the SEC proposal. It is clear that the SEC and other regulatory agencies aim is regulating the crypto sector, but there is an at least equal amount of opposition from the crypto sector and advocates.

A consistent theme as the White House and regulatory agencies aim to regulate decentralized platforms is what many call “underhanded” or “backdoor” ways of gaining oversight. The question now is whether they will gain any ground or be able to overcome the massive opposition that is building against their tactics. 

Stay tuned to Web3 Law Center for updates on the SEC’s proposal.