SEC approves requirement to register liquidity providers in DeFi

It will take final effect in April 2025

07.02.2024 - 10:48

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3 min

What’s new? The US Securities and Exchange Commission (SEC) has approved a rule that will require cryptocurrency liquidity providers, including participants in the decentralized finance (DeFi) sector, to comply with federal securities laws and register as a dealer. The new rule will affect persons who transact in cryptocurrencies that fall under the definition of securities and have more than $50 million in assets.

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What else is known? The initiative, first proposed in March 2022, has faced criticism due to the fact that DeFi protocols have no central supervisory authority and are essentially just software. The DeFi Education Fund called the new rule “misguided and unworkable.”

The organization’s representatives explained that automated market makers (AMMs) are execution protocols that create liquidity pools and lock assets into a smart contract to facilitate trading.

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The organization also said it directly forwarded its comments to the SEC, but officials “failed to confront the substance of our concerns but also failed altogether to articulate any discernible path to compliance for DeFi market participants.”

“Imposing obligations on entities in the DeFi ecosystem that cannot be complied with is wrong, impractical, and hostile to innovation,” the fund concluded.

SEC Commissioner Hester Peirce, who voted against the new rule, also noted that AMMs, being software protocols, would not be able to register as dealers. For his part, SEC chair Gary Gensler said that requiring any liquidity providers to register as dealers is consistent with the vision of Congress. The rules were approved by three out of five commissioners, with Mark Ueda also opposed.

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The rules will go into effect 60 days after they are published in the Federal Register. And they will require mandatory enforcement one year after enactment, in April 2025.

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