SEC Reopens Comment Period for Proposed Amendments to Rule 3b-16 to Address Crypto Platforms | Practical Law

SEC Reopens Comment Period for Proposed Amendments to Rule 3b-16 to Address Crypto Platforms | Practical Law

The SEC reopened the comment period for its 2022 proposal to amend the statutory definition of "exchange" under Exchange Act Rule 3b-16. The SEC issued the reopening release to provide supplemental information and economic analysis on how the amended definition of "exchange" would impact crypto trading platforms and trading systems that use distributed ledger or blockchain technology, including decentralized finance (DeFi) trading systems.

SEC Reopens Comment Period for Proposed Amendments to Rule 3b-16 to Address Crypto Platforms

by Practical Law Corporate & Securities
Published on 18 Apr 2023 • USA (National/Federal)
The SEC reopened the comment period for its 2022 proposal to amend the statutory definition of "exchange" under Exchange Act Rule 3b-16. The SEC issued the reopening release to provide supplemental information and economic analysis on how the amended definition of "exchange" would impact crypto trading platforms and trading systems that use distributed ledger or blockchain technology, including decentralized finance (DeFi) trading systems.
On April 14, 2023, the SEC reopened the comment period for its 2022 proposal to amend the statutory definition of "exchange" under Exchange Act Rule 3b-16. After receiving a number of comments from crypto market participants, the SEC issued the reopening release to provide supplemental information and economic analysis on how the amended definition of "exchange" would impact crypto trading platforms and trading systems that use distributed ledger or blockchain technology, including decentralized finance (DeFi) trading systems.
Notably, the SEC's reopening release not only makes clear that Rule 3b-16, as proposed to be amended, would likely apply to some crypto trading platforms and DeFi trading systems, it also states that systems trading a large number of crypto assets today likely meet the existing criteria under Rule 3b-16. Trading platforms and systems that meet the current definition of "exchange" under Rule 3b-16 must either register with the SEC as a national securities exchange or comply with the conditions of Regulation ATS. The release notes that the proposed amendments to Rule 3b-16 would not change any existing obligation to do so.
The statements on the application of Rule 3b-16, as proposed to be amended and as it exists currently, to crypto markets and DeFi platforms reiterate the SEC's position that the federal securities laws apply to crypto assets that are securities. However, the SEC is requesting additional comment on its proposed amendments to Rule 3b-16 with regard to how crypto and DeFi trading systems could comply with the proposed amended exchange regulatory framework, such as how a DeFi trading system might register as a broker-dealer in order to comply with Regulation ATS (see Practice Note, Determining Broker-Dealer Status: Alternative Trading Systems).
The SEC is also requesting additional comment on certain other aspects of its proposed amendments, including, among others:
  • Replacing the phrase "uses established, non-discretionary methods" with the phrase "makes available established, non-discretionary methods."
  • Adding "communication protocols" as an example of an established, non-discretionary method for bringing together buyers and sellers.
  • Compliance dates for the proposed amendments, if adopted.
The new comment period will remain open until 30 days after publication in the Federal Register or June 13, 2023, whichever is later.
For more information on the SEC's proposed amendments and potential impact on DeFI and crypto trading platforms, see Legal Update, Sheppard Mullin: SEC Proposed Amendments Could Significantly Impact DeFi Companies. For overviews of blockchain and distributed ledger technology and DeFi, see Practice Notes, Blockchain and Distributed Ledger Technology (DLT): Overview and Decentralized Finance (DeFi): Overview.