SEC hears from Blockchain Assoc., House Republicans on ‘exchange’ definition proposal

More opposition has come in at the last minute to the year-old proposal reimagining the SEC’s definition of a securities exchange.

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The United States Securities and Exchange Commission (SEC) extended the comments period for its proposal to amend Rule 3b-16 of the Securities Exchange Act of 1934, which ended June 13. The Blockchain Association and Republican members of the House of Representatives Committee on Financial Services filed last-minute comments.

The amendments proposal, which runs for hundreds of pages, was released in January 2022. It did not mention digital assets. Another lengthy document was released when the comment period was reopened. It did address digital asset platforms. The amendments could profoundly impact the crypto industry, according to observers, and they have drawn numerous negative reactions.

The 29 Republican committee members criticized the proposal for expanding the definition of an exchange so much that it “could capture a wide range of individuals, […] including software developers and participants in a blockchain network’s consensus mechanism,” and could exceed the agency’s regulatory authority with the inclusion of “Communication Protocol Systems.” Furthermore:

“It is not clear how a developer or any other person operating software critical to the functioning of [a] blockchain network could be in compliance with the regulatory requirements for an exchange.”

The proposal is an example of the SEC’s hostility toward blockchain technology, the letter concluded, and advances SEC Chair Gary Gensler’s personal views “without adequate analysis or justification.”

Related: SEC steps back from defining digital assets in new hedge fund rules

The Blockchain Association has submitted two sets of comments already. In its latest letter, the advocacy groups argued that the SEC is exceeding its authority, citing the major questions doctrine, which the U.S. Supreme Court recently affirmed. The association also said the broad language of the proposal could make validators part of an exchange, even though they operate competitively. The proposal also raises freedom of speech concerns, according to the Blockchain Association.

The Blockchain Association also said the proposal is hostile to blockchain technology, despite its claim of being “technology neutral,” and its cost analysis is faulty. Blockchain Association CEO Kristin Smith said in a statement:

“Instead of crafting fit-for-purpose rules that recognize the unique nature of decentralized protocols and related entities, the SEC expands its jurisdiction beyond the limits originally set by Congress, while raising serious constitutional and APA [Administrative Procedure Act] concerns.”

Among other organizations that have come out in opposition to the SEC proposal are venture capital firm Paradigm and advocacy group Coin Center. SEC commissioners Hester Peirce and Mark Uyeda have also stated their opposition to the changes.

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