Intro & Call to Action The SEC's new securities exchange / ATS amendment proposal has been published, alongside a strenuous dissent from Commissioner Hester Peirce. The proposal is massive and, as noted by Peirce, encompasses a radical paradigm shift that was not contemplated in the SEC’s previous related concept release and would overrule previous no-action guidance. It does not make express reference to blockchain, DeFi, automatic market-making protocols, etc., but I nevertheless believe the SEC staff is very likely to use its expanded definitions of securities “exchange” to bolster the SEC’s currently weak arguments that AMMs constitute securities exchanges. At the same time, the proposal offers no method of registration and reporting that could actually be followed by anyone who arguably “makes available” an AMM protocol or other DeFi systems—thus, to whatever extent the proposed changes might purport to turn AMMs and other DeFi systems into “securities exchanges”, it is at a minimum irresponsible and thoughtless as regulation. Because the proposal achieves this expansion by providing new restraints on “communication protocols,” I believe it may also be unconstitutional as a restraint on free speech.
> the SEC must revise this proposal to make clear that it is not intended to, in effect, prohibit the creation and deployment of mere code for peer-to-peer token trading or websites
> There is no way mere coders or mere website operators can register with FINRA, track the identities and trades of AMM systems ... and therefore, if applied to such persons, this new rule would be banning a vast swathe of technologies and free speech regarding those technologies.
When you say "the SEC must" I feel this must be their (not only SEC) express intent as part of a wider plan that we first became alerted to with the FATF guidance last year. So the idea of objecting, while necessary and to be encouraged, is like telling an invading army that bringing their weapons across a border is against the law
Crypto regulation is way to important to leave to unelected civil servants, renowned for turning-door career moves in & out of incumbent players.
Admittedly, the 1933 Securities Act and its 1934 sister need urgent updating. The US' legislative power should undertake a major overhaul of the Securities Act and other outdated laws.
On the other hand something in me actually prefers to have House & Senate elections before such an overhaul takes place. I am sure crypto will become a major theme, if not in public debate it will be a major voting determinator for a lot of people! Until that moment, we can watch with anger and joy at the same time how Gary Gensler and other bureaucrats prove how obsolete certain sectors of public administration are making themselves at a rapid pace...
there is a further requirement that the discussions result in negotiations of a buyer and seller to buy/sell a security between each other, or result in the execution of a such a transaction....
based on my observations of how reddit is typically used (even in r/wallstreetbets), these further requirements would not typically be satisfied on Reddit....
though this raises the interesting question--if even one reddit discussion results in two parties from that thread negotiating a sale of a security, is Reddit now a securities exchange or punishable for failing to register as a securities exchange? this incredibly broad rule opens up massive prosecutorial discretion for the SEC....
> Furthermore, those who arguably “make available” AMMs, since they do not control the AMMs, have no means of ensuring that securities or tokens that are integral to a securities scheme are not traded through the AMMs—only the users of the AMMs can decide that for themselves.
Can you explain this a bit more? There remains a person/group who created the program and paid to have it launched on the chain. Why are they not responsible for their program acting within the letter of the law?
Writing a program that other people can use to violate the law is not the same as violating the law. Paying to put that program on the internet is also not a violation of the law. It looks like the SEC wants to change the law so that *someone* is on the hook if anyone uses the program. Maybe they should go after the people who are actually breaking the law -- that is, the users of the program who do something that is illegal in their country -- rather than the person who wrote the program.
Raul, I think you express their ambitions perfectly....they do not want peer-to-peer technology. They always want an intermediary in control, so that they can fully surveil and control the market by controlling the intermediary.
Don't those laws already exist for copyright? For example, I'm not at fault for you uploading illegal things to my website, but I am liable to take it down. I'm really trying to understand how this is any different.
That works because you have access to the content on your website. In the case of AMMs, once launched, they become independent of the creator. The creator no longer has any control over what is done with them or a way to monitor it any more than anyone else has.
This is a crucial feature that makes it simple for people to trust the AMM. It makes it so that while the creator sets the rules, once set, they apply equally to everyone who opts in to them, Including the creator.
It's the same as with computer software that you install locally and that doesn't phone "home". The creator cannot tell or control who uses it or what they do with it. What SEC is trying to do here is comparable to trying to require that everyone who releases software, codes in remote control functionality so they can monitor, control and report to the government what you do with that software.
These are systems built to allow truly peer-to-peer smart contracts. What SEC wants to do is to enforce every contract to have a third party involved who has the power to decide who is allowed to make use of the contract.
Consider that your friend has a candy bar and you want to buy it from him and he's willing to give it to you in exchange for 2 dollars. What SEC is trying to do here is equivalent to making it so that this exchange just simply cannot happen unless you first find a person who is a registered trade facilitator, have him check both of your identities as well inspect what you're exchanging and if and only if he's happy that both of you are allowed to engage in trading activity and that what you're trading is also acceptable, will you be able to do the exchange.
If this example doesn't click for you as to being a fair comparison, then you haven't yet quite grasped the enormous potential these systems have that'd be stifled if the SEC is allowed to have their way with this.
I definitely grasp what's happening here no need to be condescending.
First, I think something that you are failing to realize is that the laws around digital copyright are very new as well. I'm sure if they were trying to be introduced today you would have the same theoretical argument. But they are what allowed the internet to grow into a blossoming ecosystem.
Second, I don't think you realize how easy it would be for the SEC to effectively kill these types of contracts, they don't actually want to kill them which is why they are pussy footing around instead of calling all the unregistered securities what they are. Not that I'm not saying all crypto projects are securities, but some of them are and none of them are being labeled as such.
> What SEC is trying to do here is equivalent to making it so that this exchange just simply cannot happen unless you first find a person who is a registered trade facilitator,
To be frank with you, I don't care if they do this. This happens all the time every day in Canada (where I live) and nothing bad is happening here. More financial regulation, pile it on.
If you “Make Available” a service that offers a Pot and a Stove, you cannot be held liable if someone used that service to cook Meth… They chose the ingredients they put into the pot, not you. It’s not possible for you to provide that service where that is not a possibility.
If I make available a service where anyone can upload content to my servers. If you upload content that infringes on copyright I am responsible to take down the content. How is this any different?
In that case you pay for / operate the servers. A more accurate representation would be that make a service available that will take any video content and convert it from AVI to MP4 video format and you don’t retain any of the video post conversion, you just process it. You can’t be held responsible for someone using your service to convert a snuff film to MP4.
I think that's a bit facetious. It would be like having a website that says "convert your snuff films here" offers specialized tools to convert your snuff films and advertises that it's the best way to do so. Then when regulators ask if it's being used to convert snuff films the creator pretends like they don't know what it's being used for.
The cost efficiencies of AMMs should not factor into the thinking. Example: As a parent I want to introduce my children to the world of crypto. I want to setup a smart contract into which I can deposit 1 AVAX, and the contract will give each child $20/month worth of whatever token they like. We set the preference (which can change over time) through an NFT in their wallet. This is impossible through centralized exchanges (no accounts for minors and tokens have to be listed first), but easy with AMMs. There are thousands of these examples which will all be killed by legislation.
Yeah I don't buy this argument. You are saying you want to circumvent the rules but you are not arguing to change the rules of the existing system.
These rules exist for a reason, and if you don't think they are good let's change them unilaterally. But I don't understand the argument that you should be able to skirt existing regulations because it's decentralized.
I get your point. Binging that back to Crypto though. Thats saying that every swap / conversion on a DEX is illegal, and the author of the DEX is offering the service knowing that all uses of the service are illegal.
I fundamentally disagree with that view. Thats similar to the view that the majority of Bitcoin is used for illegal activities, or that it’s fair to have all transactions >$600 be reported to the government because it might be illegal. Punishing the many for the crimes of the few.
I think its more like, the AMMs are offering a service that is very likely to be used by bad actors right now. The fees are so huge relative to the centralized exchanges that it's difficult to understand why anyone would use them vs a service like coinbase unless something shady is going on.
As for the reporting, I don't think 600 should be the limit, but most countries have similar laws about large values of cash and I don't see any problems with that. (I don't want this conversation to spiral in this direction I'm just offering a quick opinion)
Thank u for this. My only question is: how
does one take action from here? What activities can people engage in to succeed in getting the SEC to change the proposal within the next 30 days ?
follow @LeXpunK_Army on twitter for more info
With Gensler's broad statement this could also target secondary market IPO platform for alternative asset investing like Rally, Masterworks or Otis
yep
Thank you for this great summary.
> the SEC must revise this proposal to make clear that it is not intended to, in effect, prohibit the creation and deployment of mere code for peer-to-peer token trading or websites
> There is no way mere coders or mere website operators can register with FINRA, track the identities and trades of AMM systems ... and therefore, if applied to such persons, this new rule would be banning a vast swathe of technologies and free speech regarding those technologies.
When you say "the SEC must" I feel this must be their (not only SEC) express intent as part of a wider plan that we first became alerted to with the FATF guidance last year. So the idea of objecting, while necessary and to be encouraged, is like telling an invading army that bringing their weapons across a border is against the law
Crypto regulation is way to important to leave to unelected civil servants, renowned for turning-door career moves in & out of incumbent players.
Admittedly, the 1933 Securities Act and its 1934 sister need urgent updating. The US' legislative power should undertake a major overhaul of the Securities Act and other outdated laws.
On the other hand something in me actually prefers to have House & Senate elections before such an overhaul takes place. I am sure crypto will become a major theme, if not in public debate it will be a major voting determinator for a lot of people! Until that moment, we can watch with anger and joy at the same time how Gary Gensler and other bureaucrats prove how obsolete certain sectors of public administration are making themselves at a rapid pace...
Would this proposal cover Reddit, Twitter, or other platforms where people discuss trading/investments?
there is a further requirement that the discussions result in negotiations of a buyer and seller to buy/sell a security between each other, or result in the execution of a such a transaction....
based on my observations of how reddit is typically used (even in r/wallstreetbets), these further requirements would not typically be satisfied on Reddit....
though this raises the interesting question--if even one reddit discussion results in two parties from that thread negotiating a sale of a security, is Reddit now a securities exchange or punishable for failing to register as a securities exchange? this incredibly broad rule opens up massive prosecutorial discretion for the SEC....
> Furthermore, those who arguably “make available” AMMs, since they do not control the AMMs, have no means of ensuring that securities or tokens that are integral to a securities scheme are not traded through the AMMs—only the users of the AMMs can decide that for themselves.
Can you explain this a bit more? There remains a person/group who created the program and paid to have it launched on the chain. Why are they not responsible for their program acting within the letter of the law?
Writing a program that other people can use to violate the law is not the same as violating the law. Paying to put that program on the internet is also not a violation of the law. It looks like the SEC wants to change the law so that *someone* is on the hook if anyone uses the program. Maybe they should go after the people who are actually breaking the law -- that is, the users of the program who do something that is illegal in their country -- rather than the person who wrote the program.
Raul, I think you express their ambitions perfectly....they do not want peer-to-peer technology. They always want an intermediary in control, so that they can fully surveil and control the market by controlling the intermediary.
Don't those laws already exist for copyright? For example, I'm not at fault for you uploading illegal things to my website, but I am liable to take it down. I'm really trying to understand how this is any different.
That works because you have access to the content on your website. In the case of AMMs, once launched, they become independent of the creator. The creator no longer has any control over what is done with them or a way to monitor it any more than anyone else has.
This is a crucial feature that makes it simple for people to trust the AMM. It makes it so that while the creator sets the rules, once set, they apply equally to everyone who opts in to them, Including the creator.
It's the same as with computer software that you install locally and that doesn't phone "home". The creator cannot tell or control who uses it or what they do with it. What SEC is trying to do here is comparable to trying to require that everyone who releases software, codes in remote control functionality so they can monitor, control and report to the government what you do with that software.
These are systems built to allow truly peer-to-peer smart contracts. What SEC wants to do is to enforce every contract to have a third party involved who has the power to decide who is allowed to make use of the contract.
Consider that your friend has a candy bar and you want to buy it from him and he's willing to give it to you in exchange for 2 dollars. What SEC is trying to do here is equivalent to making it so that this exchange just simply cannot happen unless you first find a person who is a registered trade facilitator, have him check both of your identities as well inspect what you're exchanging and if and only if he's happy that both of you are allowed to engage in trading activity and that what you're trading is also acceptable, will you be able to do the exchange.
If this example doesn't click for you as to being a fair comparison, then you haven't yet quite grasped the enormous potential these systems have that'd be stifled if the SEC is allowed to have their way with this.
I definitely grasp what's happening here no need to be condescending.
First, I think something that you are failing to realize is that the laws around digital copyright are very new as well. I'm sure if they were trying to be introduced today you would have the same theoretical argument. But they are what allowed the internet to grow into a blossoming ecosystem.
Second, I don't think you realize how easy it would be for the SEC to effectively kill these types of contracts, they don't actually want to kill them which is why they are pussy footing around instead of calling all the unregistered securities what they are. Not that I'm not saying all crypto projects are securities, but some of them are and none of them are being labeled as such.
> What SEC is trying to do here is equivalent to making it so that this exchange just simply cannot happen unless you first find a person who is a registered trade facilitator,
To be frank with you, I don't care if they do this. This happens all the time every day in Canada (where I live) and nothing bad is happening here. More financial regulation, pile it on.
If you “Make Available” a service that offers a Pot and a Stove, you cannot be held liable if someone used that service to cook Meth… They chose the ingredients they put into the pot, not you. It’s not possible for you to provide that service where that is not a possibility.
If I make available a service where anyone can upload content to my servers. If you upload content that infringes on copyright I am responsible to take down the content. How is this any different?
In that case you pay for / operate the servers. A more accurate representation would be that make a service available that will take any video content and convert it from AVI to MP4 video format and you don’t retain any of the video post conversion, you just process it. You can’t be held responsible for someone using your service to convert a snuff film to MP4.
I think that's a bit facetious. It would be like having a website that says "convert your snuff films here" offers specialized tools to convert your snuff films and advertises that it's the best way to do so. Then when regulators ask if it's being used to convert snuff films the creator pretends like they don't know what it's being used for.
The cost efficiencies of AMMs should not factor into the thinking. Example: As a parent I want to introduce my children to the world of crypto. I want to setup a smart contract into which I can deposit 1 AVAX, and the contract will give each child $20/month worth of whatever token they like. We set the preference (which can change over time) through an NFT in their wallet. This is impossible through centralized exchanges (no accounts for minors and tokens have to be listed first), but easy with AMMs. There are thousands of these examples which will all be killed by legislation.
Yeah I don't buy this argument. You are saying you want to circumvent the rules but you are not arguing to change the rules of the existing system.
These rules exist for a reason, and if you don't think they are good let's change them unilaterally. But I don't understand the argument that you should be able to skirt existing regulations because it's decentralized.
I get your point. Binging that back to Crypto though. Thats saying that every swap / conversion on a DEX is illegal, and the author of the DEX is offering the service knowing that all uses of the service are illegal.
I fundamentally disagree with that view. Thats similar to the view that the majority of Bitcoin is used for illegal activities, or that it’s fair to have all transactions >$600 be reported to the government because it might be illegal. Punishing the many for the crimes of the few.
I think its more like, the AMMs are offering a service that is very likely to be used by bad actors right now. The fees are so huge relative to the centralized exchanges that it's difficult to understand why anyone would use them vs a service like coinbase unless something shady is going on.
As for the reporting, I don't think 600 should be the limit, but most countries have similar laws about large values of cash and I don't see any problems with that. (I don't want this conversation to spiral in this direction I'm just offering a quick opinion)
If one simply offers tokens for sale on their website but not offering to purchase or to set up purchasing capability, does that constitute a AMM?
If one simply offers tokens for sale on their website but not offering to purchase or to set up purchasing capability, does that constitute a AMM?
The new "thought" police. Policing private debates about what to do.