Here’s how SEC Chairman Gensler’s new exchange definition could affect crypto

Gary Gensler, chairman of the US Securities and Exchange Commission (SEC), believes that there have been significant changes in the financial market that require updated definitions of exchanges and alternative trading platforms.

During the 10th Annual U.S. Treasury Market Conference on Sept. 26, Gensler highlighted changes in capital markets since the SEC first adopted regulations targeting alternative trading systems in 1998 and outlined some steps that the agency has taken to bring the regulatory landscape up to speed.

These regulations are likely to apply to crypto exchanges and trading platforms because Gensler has insisted over the years that they are the purview of the SEC.

Redefining distributors and exchanges

Gensler explained to attendees at the Treasury Market Conference that a large portion of secondary markets are now facilitated by electronic trading platforms and algorithmic strategies. These platforms were exempted from fallback regulations introduced during the tenures of Bob Rubin and Arthur Levitt as the 70th Secretary of the Treasury and 25th Chairman of the SEC, respectively.

Given the changes in trading systems, the SEC proposed a new set of rules in 2022 that would require platforms that provide Treasuries markets to register as brokers. The SEC expanded the definition of traders in securities markets to include principal trading firms, which use algorithmic and high-frequency trading strategies to provide services such as exchanges and alternative trading platforms.

After their introduction, the proposed rules faced backlash from pro-crypto politicians. Regardless, they were revived last year with the addition of a section specifically dedicated to decentralized finance (DeFi).

Despite criticism of the proposal, Gensler believes it would close regulatory gaps between trading platforms and manage risks in the financial system.

Protection of investors and financial markets

According to Gensler, the new rules are critical to protecting investors and financial markets because the trading platforms in question have refused to register with the SEC as dealers despite their regular involvement in buying and selling securities.

While the SEC has adopted final rules defining what it means to be a dealer, changes to regulations targeting alternative trading platforms have yet to be finalized. If the proposed implementation of these changes is approved, the SEC would mandate that all trading platforms, including crypto exchanges, be subject to the agency’s laws.

With the battle over which cryptocurrencies the SEC classifies as securities still ongoing, the approval of the proposal may not bode well for the digital asset community.

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