Oct. 18, 2023
The proposed definition of "exchange" is not appropriate for a decentralized cryptocurrency that is not traded on a centralized exchange, such as Coinbase, due to the decentralized nature of cryptocurrency and DeFi platforms and the way that users of DeFi platforms interact with DeFi platforms in a trustless manner via smart contract. The proposed definition of "exchange" is as follows: An organization, association, or group of persons that brings together buyers and sellers of securities, or facilitates trading between or among buyers and sellers of securities. This definition is overly broad, encompassing a wide range of trading platforms, including centralized exchanges, decentralized exchanges (DEXs), and even peer-to-peer (P2P) trading platforms. However, there are several key differences between centralized exchanges and DEXs. Centralized exchanges are controlled by a single entity, which is responsible for maintaining the order book, executing trades, and holding customer assets. DEXs, on the other hand, are non-custodial and decentralized, meaning that there is no single entity in control. Instead, trades are executed on-chain using smart contracts. This decentralized nature of DEXs makes it difficult to apply the proposed definition of "exchange" to them. For example, it is not clear who or what constitutes the "organization, association, or group of persons" that brings together buyers and sellers on a DEX. Additionally, DEXs do not facilitate trading in the same way that centralized exchanges do. Instead, they provide a platform for users to trade directly with each other in a trustless manner. Due to these differences, it is not appropriate to apply the proposed definition of "exchange" to decentralized cryptocurrencies that are not traded on centralized exchanges. Forcing DEXs to register as exchanges would stifle innovation and make it more difficult for users to access these platforms. Here is a specific example of how the proposed definition of "exchange" would not work for a DEX: Centralized exchange: A user deposits funds into their account on the exchange and then places an order to buy or sell a cryptocurrency. The exchange then executes the trade and stores the cryptocurrency in the user's account. DEX: A user connects their wallet to the DEX and then places an order to buy or sell a cryptocurrency. The order is then matched with another user's order on the DEX and the trade is executed on-chain. The user's funds remain in their wallet at all times. Under the proposed definition of "exchange" the DEX would be considered an exchange because it facilitates trading between buyers and sellers of securities. However, it is important to note that the DEX does not have control over the user's funds or the execution of the trade. The trade is executed on-chain using a smart contract, which is a self-executing contract that is stored on the blockchain. This means that the DEX does not meet all of the criteria for a centralized exchange. It does not have control over the user's funds or the execution of the trade, and it does not provide the same level of services as a centralized exchange. Forcing DEXs to register as exchanges would stifle innovation and make it more difficult for users to access these platforms. It is important to develop a regulatory framework that is appropriate for the unique characteristics of DEXs and other DeFi platforms.