February 26, 2024

SEC Adopts New Rules to Broaden Market Participant Oversight, Potentially Impacting Crypto Industry

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On February 6, the United States Securities and Exchange Commission (SEC) made a pivotal move by adopting new rules that are set to expand oversight on market participants. The regulations mandate additional entities to register with the SEC, become members of self-regulatory organizations, and adhere to federal securities laws and regulations. The implications of these rules extend to the crypto and decentralized finance (DeFi) sectors, potentially subjecting them to increased scrutiny and regulation.

The comprehensive set of rules, outlined in a 247-page document, had been proposed in 2022 and focuses on redefining key terms such as “dealer” and “government securities dealer” in the Securities Act Rules. Additionally, the rules address the phrase “as a part of a regular business,” as originally used in the Securities Exchange Act of 1934.

Under the new definitions, the rules are designed to apply to market participants who play significant roles in providing liquidity within the markets. Specifically, a “dealer” in the context of these rules is someone expressing “trading interest that is at or near the best available prices on both sides of the market for the same security” or earning revenue “primarily from capturing bid-ask spreads.”

SEC Chairman Gary Gensler underscored the importance of these rules, emphasizing their application to entities taking on substantial liquidity-providing roles in the markets. This move is part of the SEC’s ongoing efforts to adapt regulatory frameworks to the evolving landscape of financial markets, including the burgeoning crypto and DeFi sectors.

While the rules are seen as a step towards more comprehensive oversight, they may also encounter resistance, particularly from hedge funds involved in trading treasury notes. This broader regulatory push comes at a time when the crypto industry is grappling with the need for a well-defined regulatory framework. Major players in the crypto space, such as Coinbase, are actively advocating for clear and coherent regulations to foster responsible growth and protect investors.

As the SEC continues to shape its regulatory approach, 2024 may prove to be a crucial year for the crypto industry, determining the extent of regulatory oversight and its impact on market participants. The balance between fostering innovation and ensuring consumer protection remains a key consideration as the regulatory landscape evolves.

James Cullen
Digital Assets Desk

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