Cryptocurrency Firms Push Back On Treasury Markets Policing Proposal

WASHINGTON — A Securities and Exchange Commission proposal to make Treasury markets more resilient has sparked a backlash from cryptocurrency firms, who say it could increase legal risks for so-called finance platforms decentralized, or DeFi.

The rule, proposed by the SEC in January, would expand the agency’s definition of an exchange to include a broader range of communication systems that allow potential buyers and sellers of securities to find each other. These entities would have to register with the SEC either as related exchanges to the New York Stock Exchange or as a class of broker-dealers called alternative trading systems, or ATS, which perform functions similar to those of an exchange. but are subject to lighter regulations.


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An SEC-imposed deadline for public comment on the proposal ended last week. The next step for the agency will be to analyze feedback from investors, companies and industry groups in the coming months before deciding whether or not to finalize a rule.

Many of the proposal’s most vocal opponents are in the cryptocurrency industry, which is not the intended target of the rule. Businesses, including the Coinbase Global trading platform Inc.,

Venture capital firm Andreessen Horowitz and stablecoin issuer Circle Internet Financial Inc., along with several cryptocurrency-focused lobby groups, warned the plan would create more legal uncertainty.

The SEC’s current definition of an exchange involves an entity that matches orders from multiple buyers and sellers, and “uses established, non-discretionary methods” to determine how those orders interact with each other. According to the proposal, the definition would replace the word ‘use’ with ‘provide’ to encompass so-called communication protocol systems which play a more passive role in enabling potential traders to interact, trade and achieve a deal.

SEC officials say their goal is to monitor the messaging systems that professional traders use to get price quotes for Treasuries and other fixed-income securities.

These electronic platforms essentially perform the same function as stock exchanges, but are subject to little or no oversight by regulators. In 2019, the largest electronic trading platform for Treasuries, BrokerTec, suffered a roughly 90-minute outage on a Friday afternoon that could have rattled the entire market had it occurred at a different time, the SEC noted.

Coinbase is among cryptocurrency companies saying DeFi platforms face legal risks even though they are not the intended target of an SEC rule.


Shannon Stapleton/REUTERS

“I think it’s important that we consider revising the SEC rules to reflect the increased use of electronic trading platforms in the fixed income markets,” said SEC Chief Gary Gensler, in a speech Tuesday.

The agency’s nearly 600-page proposal makes no mention of cryptocurrency. However, critics say its language could potentially capture DeFi platforms, which allow users to trade cryptocurrencies without a conventional intermediary.

“The proposal may not have been designed with this developing ecosystem in mind,” attorneys for Andreessen Horowitz, who invests in crypto projects, wrote in a comment letter to the SEC. “Nevertheless, expanding the definition of an exchange in a way that could apply to DeFi protocols, at a time when it is unclear which digital assets qualify as securities, will create enormous regulatory uncertainty and deter responsible innovation.”

An SEC spokesperson said the agency generally responds to comments it receives as part of a final rule, not beforehand. The SEC enjoys strong engagement with the public and will consider all comments submitted, he said.

In the year he has been in office, Gensler has said little to suggest he would be sensitive to concerns from the DeFi industry. He repeatedly said that any trading platform that lists securities is required to register with the SEC unless it meets an exemption. Gensler also noted that, despite their marketing claims, DeFi platforms still generally rely on humans to write software and make governance decisions.

The WSJ’s Dion Rabouin explains why Wall Street is now betting big on crypto and what that means for the new asset class and its future. Photo composition: Elizabeth Smelov

Cryptocurrency advocates say DeFi software is often the work of multiple developers, who may or may not stay involved after contributing. Getting them to register with the SEC and follow its rules would be difficult, if not impossible, they say.

The SEC received 170 identical comment letters copied and pasted from a website,, which was promoted on Twitter by a group called DeFi Education Fund. “The mere making of software available to the public should not be captured as part of the SEC’s exchange or ATS registration, and the SEC should make this clear,” the letter states.

The DeFi Education Fund is financially backed by Uniswap, the largest DeFi platform.

The Wall Street Journal reported last fall that the SEC was investigating the platform’s lead developer, Uniswap Labs. Earlier this month, plaintiffs’ attorneys also filed a class action lawsuit against Uniswap and its backers alleging they unlawfully promoted, offered and sold unregistered securities.

Under federal law, anyone who buys an unregistered title can sue the seller to get their money back.

A spokeswoman for Uniswap Labs said the plaintiffs’ claims are without merit and the group plans to vigorously defend itself against the lawsuit.

Representatives of asset managers and brokers also raised concerns about the proposal, saying the new wording could have far-reaching implications for their businesses.

“The broad concept of communication protocol systems could theoretically encompass hundreds, if not thousands, of systems across all asset classes,” the Securities Industry and Financial Markets Association, which represents brokers, said in a letter from comments dated April 18. By comparison, the SEC estimates that 22 so-called communications protocol systems would be subject to the new rule.

Write to Paul Kiernan at

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