The United States Securities and Exchange Commission (SEC) has been ramping up its regulation of the emerging crypto market and Decentralized Finance (DeFi) sectors. The regulatory body recently passed new rules that require certain entities to register as “dealers” or “government securities dealers.” SEC Chair Gary Gensler believes these measures will protect investors and improve market integrity, but Commissioner Hester Pierce strongly disagrees.
New SEC Rules May Stifle Competition
The new rules, Exchange Act Rules 3a5-4 and 3a44-2, redefine the term “as a part of a regular business” in the Securities Exchange Act of 1934. These rules aim to identify specific activities that would classify individuals engaging in them as “dealers” or “government securities dealers.” As a result, those who fall under these categories must register with the SEC, join a self-regulatory organization (SRO), and comply with federal securities laws and regulations.
Commissioner Pierce’s Dissent
Commissioner Hester Pierce strongly opposed the adoption of these rules. She argued that the definition of a “dealer” outlined in the rules deviates from the existing statutory framework, leading to distorted market behavior and diminished market quality. Pierce, who has been a vocal advocate for innovation and adoption in the DeFi and crypto asset sectors, criticized the broad scope of the rules, which categorize market participants engaged in investment and trading activities as dealers solely based on their liquidity-providing activities.
Pierce emphasized that the distinction between dealers and traders is crucial and has been consistently recognized by the Commission and market participants for decades. By conflating the two categories, Pierce believes that the rules create uncertainty and impose unnecessary regulatory burdens on entities that do not operate as dealers. Moreover, she suggests that this regulatory shift penalizes liquidity provision, potentially reducing market liquidity and discouraging firms from engaging in activities that contribute to positive liquidity externalities.
The Commissioner also criticized the rule’s negative impact on competition within the market. The “excessive regulatory requirements” and associated costs will likely drive smaller players out of the market, leading to concentration and homogeneity among liquidity providers. This consolidation may exacerbate market fragility rather than foster healthy competition, Pierce stated.
Pierce Calls for Revised Crypto Regulations
While the SEC argues that the rules provide comprehensive regulatory oversight, Pierce contends that effective regulation does not necessitate a prescriptive regime governing every market participant. The Commissioner highlights existing data sources and surveillance mechanisms, such as the Consolidated Audit Trail, Form PF, TRACE, and large trader reporting, that already facilitate regulatory oversight without imposing burdensome regulations on liquidity providers.
Pierce further stated that in addition to these “fundamental flaws,” the new rules pose implementation challenges and lack clarity regarding their application to the crypto markets. The scope of the rules remains unclear, potentially subjecting unanticipated firms to registration requirements. Pierce said that the short implementation period, the involvement of multiple regulators such as FINRA and SIPC, and potential interactions with other rules further complicate the situation.
Given the concerns raised and the arbitrary nature of the rule’s classification, Commissioner Pierce requested that the rule be repurposed to allow stakeholders to provide feedback on a substantially revised version. Ultimately, Pierce emphasized the need for a more rigorous and predictable process that avoids “arbitrary” outcomes based on chance and the Commission’s whims.