Cryptocurrency Firms Push Back Against Proposal to Police Treasury Markets


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

The rule, proposed by the SEC in January, would expand the agency’s definition of an exchange to include a broader array of communication systems that enable prospective buyers and sellers of securities to find each other. Such entities would have to register with the SEC either as exchanges akin to the New York Stock Exchange, or as a category of broker-dealers called alternative trading systems, or ATSs, which perform exchange-like functions but face lighter regulations.


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An SEC-imposed deadline for public comment on the proposal ended last week. The agency’s next step will be to analyze feedback from investors, companies and industry groups in the coming months before deciding whether to finalize a rule.

Many of the proposal’s loudest opponents are in the cryptocurrency industry, which isn’t the rule’s intended target. Companies including trading platform

Coinbase Global Inc.,

venture-capital company Andreessen Horowitz, and stablecoin issuer Circle Internet Financial Inc., as well as several cryptocurrency-focused lobbying groups, warned that 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, nondiscretionary methods” for determining how those orders interact with each other. Under the proposal, the definition would replace the word “uses” with “makes available” to capture so-called communication protocol systems that take a more passive role in enabling prospective traders to interact, negotiate and reach an agreement.

SEC officials say their goal is to bring oversight to messaging systems that professional traders use to obtain price quotes for Treasury bonds and other fixed-income securities.

These electronic platforms perform essentially the same function as exchanges but face little or no oversight from regulators. In 2019, the largest electronic trading platform for Treasurys, BrokerTec, suffered a roughly 90-minute outage on a Friday afternoon that could have shaken the broader market if it had occurred at a different time, the SEC noted.

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


Shannon Stapleton/REUTERS

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,” lawyers for Andreessen Horowitz, which invests in crypto projects, wrote in a comment letter to the SEC. “Nevertheless, broadening the definition of an exchange in a manner that could apply to DeFi protocols, at a time when it is unclear which digital assets are considered securities, will create tremendous regulatory uncertainty and deter responsible innovation.”

An SEC spokesman said the agency generally responds to comments it receives as part of a final rule making and not beforehand. The SEC benefits from robust engagement with the public and will review all submitted comments, he said.

In the year that he has been on the job, SEC chief

Gary Gensler

has said little to suggest he would be sympathetic to the DeFi industry’s concerns. He has repeatedly said that any trading platform that lists securities is required to register with the SEC unless it meets an exemption. Mr. Gensler has also noted that, despite their marketing claims, DeFi platforms still typically rely on humans to write software and make governance decisions.

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 composite: Elizabeth Smelov

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

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

The SEC received 170 identical comment letters copied and pasted from a website,, that was promoted on Twitter by a group called DeFi Education Fund. “Merely making software available to the public should not be captured under the SEC’s exchange or ATS registration framework, and the SEC should clearly state that,” the letter said.

Representatives of asset managers and broker-dealers also raised concerns about the proposal, saying the new language could have far-reaching consequences for their businesses.

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

Write to Paul Kiernan at

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