The SEC adopted a set of rules on Tuesday that further expands the definition of a securities dealer, requiring those that take on liquidity provision roles – including automated market makers – to register with the agency.

The U.S. Securities and Exchange Commission (SEC) has adopted a redefined set of rules that could potentially bring major decentralized finance (DeFi) protocols within the scope of their regulatory oversight.

In a meeting on Feb. 6, the Commission voted 3-2 to adopt rulemaking that defines a dealer as a market participant that provides liquidity, and acts as a market maker. 

This would include those transacting in what the SEC refers to as “crypto asset securities,” and the Commission argued that the dealer framework would apply to the trading activities rather than the type of security being traded. The rule applies to dealers in control of at least $50 million worth of funds. 

“Persons, including persons using so-called ‘automated market makers,’ that are engaged in buying and selling securities for their own account must consider whether they are dealers under the final rules, and thus subject to dealer registration requirements,” read one section of the 247-page document explaining the final rule. 

SEC Commissioners Hester Peirce and Mark Uyeda opposed the rule, with Peirce saying that the rule “eviscerates” the dealer/trader distinction in the statute and the SEC’s own guidance, while Uyeda noted that the public should be concerned about the “immense scope of this claimed jurisdiction.” 

Pierce also questioned how those who act as liquidity providers in automated market makers (AMMs) would register, to which a member of the SEC staff said that AMMs were more than software.

🚨Very important exchange from today’s SEC hearing where SEC staff assert that the new broker-dealer rule will make all LPs in AMMs into securities dealers with a registration requirement. Paraphrase of @HesterPeirce ‘s incisive questioning of staff below: 🚨

Staff:
“AMM is…

— _gabrielShapir0 (@lex_node) February 6, 2024

When she pressed on to ask how many people would likely be pulled in to register under this system, she was told that there was no data on those numbers given the lack of transparency or compliance.

“They’re not compliant because they can’t figure out our rules. And this will be a huge implementation challenge for us,” said Peirce. 

The rule came as a disappointment to entities like the Blockchain Association and the DeFi Education Fund, that have long advocated for clearer rules for the industry, and outlined their concerns to the SEC when the framework was first proposed.

Today’s final rule from the SEC on the definition of a “dealer” cements an unworkable rule and is a setback for innovation in the digital asset ecosystem.

In May 2022, we outlined our concerns to the SEC: https://t.co/bvTqb65Pfe

Our Head of Legal @MTCoppel on today’s rule: pic.twitter.com/5G7RKkBWkZ

— Blockchain Association (@BlockchainAssn) February 6, 2024