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SEC "Dealer" Rulemaking; Submit Comments; CFTC Hearing

1. SEC Proposed Dealer Rulemaking

What happened?


The SEC proposed a new rulemaking that would more broadly define which securities market participants are considered “dealers.” The rulemaking creates a qualitative test to determine which liquidity providers need to register as dealers. Under the new rule, an active trader that does not have any clients may still be considered a “dealer” and be required to register with the SEC.

Commissioner Hester Peirce expressed concern about the scope of the rulemaking. She questioned whether imposing further requirements on market participants would restrict liquidity in certain areas of the market and highlighted that the market generally benefits when there are more liquidity providers. She also questioned whether there was a clear rationale for expanding dealer registration.


What does this mean?


Yet again the SEC has proposed a rulemaking that could impact DeFi. But it’s impossible to know with certainty whether that’s the intent of this new rulemaking because it never actually mentions DeFi.


The proposal specifically states that it is designed to capture dealing activity on “Communication Protocol Systems.” You’ll remember that term from the SEC’s other proposal (“Exchange Rulemaking”) from last month that similarly could affect DeFi even though it doesn’t mention DeFi or digital assets in its 651 pages.


We’re responding to both.


If you haven’t submitted a comment on the SEC’s Exchange Rulemaking, we’ve put together a form letter that you can send straight to the SEC at protectdefi.org. The more people that write to the SEC requesting the SEC clarify its proposed rule, the more likely it is that the SEC will.


In response to this newest proposal, the DEF is also writing its own comment letter to lay out the many legal and practical concerns it raises. We’ll provide an update once we have a better sense of how the rulemaking could affect DeFi market participants.


2. CFTC Chairman Testifies Before the House Agriculture Committee

What happened?


Chairman of the Commodity Futures Trading Commission (CFTC) Rostin Behnam testified before the House Agriculture Committee on Thursday. In his written testimony, he highlighted the CFTC’s role in the digital asset markets under its existing authority to deter fraud and manipulation. He also said that the CFTC was preparing to coordinate with other agencies in response to the President’s Executive Order on Ensuring Responsible Development of Digital Assets.


Committee Chair David Scott (D-GA) expressed grave concern about FTX’s recent proposal to the CFTC that, if approved, would allow it to clear margined derivatives trades directly for its customers. Scott expressed his belief that approval of this proposal would increase risk to the derivatives market and for retail customers. Chairman Behnam responded that the CFTC would review the proposal with diligence and consideration for risks, but he also emphasized that he is mandated under the Commodities Exchange Act to support responsible innovation and his view that the proposal could lead to “more efficient trading execution, less risk in the system.”


Ranking Member Glenn Thompson (R-PA) outlined his bill, the Digital Commodity Exchange Act, which would ground CFTC authority in digital asset markets in five principles: foster innovation, protect market participants, reduce complexity, promote principles-based regulation, and complement existing authorities. Chairman Behnam agreed with the principles and said that his agency’s rulemakings would be grounded in them.


What does this mean?


While nothing substantively DeFi-centric came up, this was a productive hearing and was another important step towards the potential federal regulation of digital asset spot markets. As Chairman Behnam emphasized, he has a duty to support responsible innovation. The Chairman is taking that duty seriously by working with market participants like FTX to potentially implement novel structures that could improve the efficiency of the markets. Regardless of whether one supports FTX’s specific proposal, the fact that it has been proposed and is being debated evidences the CFTC’s open-minded and deliberate approach to the digital asset ecosystem.