The US Securities and Exchange Commission (SEC) could expand its definition of exchange to have direct implications for Bitcoin, cryptocurrencies and decentralized finance (DeFi).
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per hour report from Bloomberg’s ETF experts James Seyffart and Eric Balchunas, BTC spot ETF proponents will be the biggest winner of this potential opportunity.
In 2021, the Commission approved a Bitcoin-linked futures ETF in the US for the first time in history. This was celebrated in the crypto industry, but Balchunas, Seyffart and other experts pointed out the inefficiencies of this investment product.
A spot ETF linked to BTC would be more beneficial for consumers, according to them. However, the Commission claimed that the BTC futures ETF offers more “protection”.
This did not stop investment firms from applying for a BTC spot ETF. The SEC rejected these petitions because it believes the investment product would lack the regulatory framework to prevent harm to consumers.
The exchange expansion could change this status quo. Through his Twitter account, Seyffart said†
This is the same rule change proposal that would likely open the door to a spot bitcoin ETF if passed as written.
As the experts wrote, this change does not affect cryptocurrencies or the crypto industry, but it could force crypto exchanges and DeFi platforms to register with the SEC. For example, Seyffart and Balchunas believe that the Commission will lose all arguments to continue to reject a Bitcoin spot ETF.
As the expert wrote, the change in the definition of exchange could be implemented sometime in the fourth quarter, 2022 or the second quarter of 2023. While good for institutional investors looking to gain exposure to Bitcoin, the new definition could be a first step in classifying all DeFi assets as securities:
The definition of what constitutes an exchange and an ATS (alternative trading system) is broadening. I think many cryptos will also be considered securities. So for some of these crypto exchanges to work, they have to do it as an ATS.
What’s good for Bitcoin can be bad for DeFi
In a separate report, the DeFi Education Fund: called to the community to address this potential problem. Through their official Twitter handle, this organization instructed DeFi users to demand “clarification” from the US regulator.
Despite not including cryptocurrencies or DeFi, the organization believes there are “danger signs”. The DeFi Education Fund said:
In a nutshell, the proposed rule would potentially require any organization/association/group of people that “provide” a “communication protocol system” (CPS) to comply with financial regulations designed for exchanges like NYSE as a CPS to enable people to communicate and agree to trading terms.
The definition of what a communication protocol system (CPS) is is unclear. The DeFi Education Fund therefore decided to take action and demand more clarity.
DeFi users can email a comment to the U.S. regulator until April 18, 2022 at this link. The organization wants to prevent the SEC from creating “more uncertainty for DeFi”. The DeFi Education Fund concluded:
The more people respond to clarification, the more likely the SEC will consider changes.
SEC Commissioner Hester Peirce has commented on this potential definition change. Peirce believes this change “goes well beyond the scope of the draft release” and could impact multiple industries.
The protocols that run on top of Ethereum and other blockchains such as Uniswap, SushiSwap, and Aave are decentralized. Smart contracts can ignore the SEC, but this change could create new obstacles for developers and users.
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At the time of writing, Bitcoin is trading at $46,468 with a gain of 1.5% in the last 24 hours.
BTC with gains on the 4-hour chart. Source: BTCUSD Tradingview