Oct. 18, 2023
The proposed amendments to the definition of exchange would not adequately protect investors in crypto asset securities for a number of reasons. First, the proposed amendments are too broad and would capture a wide range of platforms that do not pose the same risks to investors as centralized exchanges. For example, the proposed amendments would capture decentralized exchanges (DEXs) and peer-to-peer (P2P) trading platforms. DEXs and P2P platforms are non-custodial, meaning that users do not deposit their funds with the platform. This makes DEXs and P2P platforms less risky than centralized exchanges, which hold customer funds in custody. Second, the proposed amendments do not address the unique risks posed by crypto asset securities. Crypto asset securities are often highly volatile and speculative, and they may be illiquid, meaning that it can be difficult to buy or sell them. The proposed amendments do not provide any additional protections for investors in crypto asset securities, such as requirements for disclosure or market manipulation prevention. Third, the proposed amendments are not enforceable against decentralized exchanges. DEXs are not controlled by a single entity, and they are often operated on a global scale. This makes it difficult for regulators to enforce any rules against DEXs. Here are some specific examples of how the proposed amendments would not adequately protect investors in crypto asset securities: Pump-and-dump schemes: Pump-and-dump schemes are a type of market manipulation where scammers artificially inflate the price of a security and then sell their holdings at a profit. Pump-and-dump schemes are common in the crypto asset market, and they can pose a significant risk to investors. The proposed amendments do not provide any additional protections for investors against pump-and-dump schemes. Illiquidity: Crypto asset securities can be illiquid, meaning that it can be difficult to buy or sell them. This can make it difficult for investors to exit their positions, and it can also make it easier for scammers to manipulate the market. The proposed amendments do not provide any additional protections for investors against illiquidity. Rug pulls: Rug pulls are a type of scam where the developers of a crypto asset project abandon the project and steal investors' funds. Rug pulls are common in the crypto asset market, and they can pose a significant risk to investors. The proposed amendments do not provide any additional protections for investors against rug pulls. Overall, the proposed amendments to the definition of exchange would not adequately protect investors in crypto asset securities. The proposed amendments are too broad and do not address the unique risks posed by crypto asset securities. Additionally, the proposed amendments are not enforceable against decentralized exchanges. It is important to develop a regulatory framework that is appropriate for the unique characteristics of crypto asset securities and DeFi platforms.