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McHenry, Huizenga Raise Concerns with the Impact of SEC Rulemakings on Digital Asset Ecosystem
Republican Leaders reiterate demand for Chair Gensler to provide adequate public comment periods

Washington, April 18, 2022 -

The top Republican on the House Financial Services Committee, Patrick McHenry (NC-10), and the top Republican on the Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets, Bill Huizenga (MI-02), submitted a public comment letter expressing concerns with how two recent Securities and Exchange Commission (SEC) rulemakings could impact the digital asset ecosystem, including decentralized finance.

The Republican Leaders outline how the SEC’s proposed expansion of the definition of “exchange” and changes to “as a part of regular business” in the definition of “dealer” could stifle innovation. They also reiterate their call for SEC Chair Gary Gensler to allow for robust input from stakeholders by providing adequate public comment periods on proposed rulemakings of at least 60 days.

Read the full letter here.

 Read key excerpts from the letter:

“Dear Chair Gensler:

“We write to express our concern with two recently proposed Securities and Exchange Commission (“SEC”) rulemakings and the impact that such rules may have on digital asset market participants.  We are particularly concerned the proposed rules can be interpreted to expand the SEC’s jurisdiction beyond its existing statutory authority to regulate market participants in the digital asset ecosystem, including in decentralized finance (DeFi).   As you know, DeFi has the potential to reduce market participants’ reliance on intermediaries. If these two rulemakings are left unaddressed, they have the potential to stifle innovation and harm market participants.

“On January 26, 2022, the SEC proposed to expand the definition of exchange, a term that is already defined in the Securities Exchange Act of 1934 (the ‘Exchange Act’). The Exchange Act defines the term ‘exchange’ to include ‘any organization, association, or group of persons, whether incorporated or unincorporated, which constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange as that term is generally understood, and includes the market place and the market facilities maintained by such exchange.’

“The proposed rule would expand this definition further to include ‘Communications Protocol Systems’ as exchanges, a step that exceeds the SEC’s statutory authority. While the SEC does not specifically define a ‘Communication Protocol System’ in the proposed amendments to Rule 3b-16, it is our understanding the SEC intends to take an expansive view. This will cause significant uncertainty for market participants that currently do not meet the requirements of an “exchange.” This potential outcome is concerning and likely to stifle innovation.

“On March 22, 2022, the SEC proposed another rule that would further define the term ‘as a part of a regular business’ for purposes of registering under Section 15 and 15c. Currently, Section 3(a)(5) of the Exchange Act defines the term ‘dealer’ as any person that is ‘engaged in the business of buying and selling securities . . . for [its] own account,’ unless it is not doing so as ‘part of a regular business.’  Under the SEC’s proposed rule, the buying and selling of securities, for one’s own account will be deemed ‘a part of a regular business’ if such person ‘engages in a routine pattern of buying and selling securities [or government securities] that has the effect of providing liquidity to other market participants,’ thus requiring registration with the SEC.   Most concerning, the SEC indicates in a footnote, but nowhere else in the rule, that the proposed rule would also encompass digital assets deemed to be securities without any additional information or related cost-benefit analysis.

“The SEC’s analysis in both proposals is insufficient to justify such proposed changes. Neither analysis fully defines the scope of the impacted market participants nor does the SEC’s justification provide sufficient details on the cost of compliance. Moreover, the rulemakings fail to define the SEC’s statutory authority. Most importantly, the SEC fails to identify the problem that the rulemakings are intended to solve, particularly as it relates to requiring certain market participants facilitating digital asset transactions to register with the SEC.

“Furthermore, the SEC has many other proposed rulemakings currently out for public comment. Like the comments above, it is extremely challenging for the public to provide comprehensive analyses to each one in a truncated time period. This is particularly true when potentially broad sweeping changes are tucked into proposed rulemakings that lack transparency regarding the intent of the changes; fail to identify the harm to the market that the proposed changes intend to mitigate; or provide the SEC’s authority to make such changes.

“We reiterate our call to the SEC that it provide public comment on all rulemakings consistent with the executive branch recommendation of at least 60 days after notice of the proposed rulemaking is published in the Federal Register.   We also request that the two rulemakings discussed above be re-proposed with sufficient economic analysis, justification, and greater clarity surrounding the intent of the rulemaking as applied to the digital asset ecosystem.”


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