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The United States Securities and Exchange Commission held a meeting last Friday to discuss a proposal to expand the definition of "exchange" to include decentralized cryptocurrency platforms.
The proposed rule change would extend SEC oversight to DeFi platforms
The commission's exchange rules deal with decentralized financial platforms, commonly known as DeFi platforms, that allow users to lend, borrow and store digital assets without the need for traditional custodians such as banks and exchanges.
In the year In January 2022, a proposal was made to expand the definition of exchanges to include platforms that use "communication protocols" such as quota request systems.
The proposed changes are expected to increase the scope of the rules beyond traditional exchanges, where many buyers and sellers participate in the same market. It is specifically intended for treasury markets and other government securities markets, where crypto brokers between traders perform exchange-like activities without proper registration.
Although aimed at the treasury and government securities markets, the proposed rule change has been rejected by crypto companies who want the SEC's oversight of DeFi platforms to be opaque.
SEC officials noted that while some DeFi platforms may meet the proposed definition, others may qualify as exchanges under the current definition.
The SEC voted 3-2 at Friday's meeting to extend the public comment period for another 30 days. This gives the public more opportunity to comment on the proposed law change. This decision was unusual, as the commission usually decides on its own to extend the public comment period.
Republican Commissioner Hester Pierce criticized the SEC's decision to reopen the comment period, arguing that the proposed rule change would encourage centralization and stifle innovation. According to Pearce, the commission will expand the scope of regulation to address problems that do not exist.
SEC Chairman Gary Gensler said that many crypto trading platforms already meet the definition of an exchange. He pointed out that most crypto trading platforms meet this definition, whether they consider themselves decentralized or not.
Nicholas Losurdo, a partner at Goodwin and adviser to former SEC Commissioner Elad Royman, said the SEC decision provided "very few answers" and raised more questions for the industry.
The crypto industry has asked the SEC to clarify regulations, but Friday's ruling leaves the agency still mulling how best to regulate the growing industry.
SEC mutual fund investors will miss the update
Mutual funds have enabled the majority of society to participate in the stock market for nearly 100 years. And the United States Securities and Exchange Commission (SEC) is following suit with another asset class and proposing changes that could negatively impact this investment asset class.
The SEC plans to require variable pricing from all mutual funds, which means that funds must adjust their daily prices to reflect changes in their asset values every time they exceed a threshold set by the SEC.
As in Europe, where compensation is optional, the SEC wants to impose a single approach on funds, despite significant enforcement difficulties in implementing this policy.
As part of this proposal, the SEC intends to impose a "hard shutdown" at 4pm on orders that are not accepted or valued until the next day.
While this change is intended to allow funds to implement floating rates based on flows, brokers and pension plans must pre-order the settlement period, depriving investors of full market access to today's prices at normal market hours.
While this may seem like a matter of efficiency, this is a complete overhaul of the fund market infrastructure. If an order comes to your broker (instead of the fund) several hours before expiration, you won't get today's price. Instead, you have to wait until the next day.
It's confusing for the millions of Americans who use mutual funds to save for college or retirement, and it hurts the 100 million Americans who live in different time zones. The unfairness of the proposal has already drawn criticism from both sides of Congress.
The reason for the SEC's mandated reinvestment is to combat the notion that shareholder redemptions impose costs on those remaining in the fund. However, this is the nature of mutual investment, and everyone moves in and out of the fund at some point.
Additionally, actual daily liquidity is negligible, averaging just one-tenth of a basis point, not enough to encourage redemptions and hardly reflected in investors' long-term returns.
The SEC's proposal is believed to be aimed at placating central bankers, who have long argued that open-ended funds are riskier than banks. However, recent developments in the banking industry prove that policymakers' focus on open money was misplaced.
Forced price movements are less likely to change investor behavior during periods of economic uncertainty, such as financial instability or credit crunches. Instead, the SEC should prioritize making markets more resilient to the challenges that arise in these situations.
Investors do not weigh the pros and cons because there is insufficient data to support the proposal. Funds expect higher costs due to "unexpected shutdowns" for all users, such as custodians and transfer agents.
It could disrupt the U.S. stock market as investors shift unnecessarily to other products.
It also poses an immediate threat of destabilizing US capital markets, prompting investors to shift to alternative products.
It is inconsistent that the SEC is pushing the United States in a different direction, as in other parts of the world, such as the European Union's retail investment strategies, which are intended to encourage strong retail investors to participate in capital markets.
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