Statement on Alternative Trading Systems and the Definition of an Exchange

Today, the Commission is considering whether to issue a supplemental release to our January 2022 proposal requiring significant trading platforms—including in the Treasury markets—to come under important rules for the markets. I believe this supplemental release would help address comments on the proposal from various market participants, particularly those in the crypto markets.

I continue to believe that the proposal would benefit investors and our markets.

First, the proposal would require certain entities in the government securities markets known as interdealer brokers (IDBs) to comply with Regulation ATS and Regulation Systems Compliance and Integrity. These IDBs function like exchanges but currently are not regulated like exchanges. In closing this regulatory gap, this proposal would promote resiliency and greater access in our $24 trillion Treasury markets as well as in other marketplaces for government securities.

Second, the proposal would modernize our rules regarding the definition of an exchange. This would account for the evolving nature and electronification of trading platforms. In particular, the proposal would require communication protocols—venues that bring together buyers and sellers of securities through structured methods to negotiate a trade—to comply with rules for exchanges. As one example, request-for-quote platforms perform several exchange-like functions in the Treasury markets, among others. Ensuring that exchange-like platforms follow our exchange-specific rules benefits investors and markets alike.

The Commission received a significant number of comments on the proposal, particularly from crypto market participants.

Make no mistake: many crypto trading platforms already come under the current definition of an exchange and thus have an existing duty to comply with the securities laws.

As I’ve said numerous times, the vast majority of crypto tokens are securities. As Justice Thurgood Marshall put it so well, “Congress’s purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called.”

Thus, given how crypto trading platforms operate, many of them currently are exchanges, regardless of the reopening release we’re considering today. These platforms match orders of multiple buyers and sellers of crypto securities using established, non-discretionary methods. That’s the definition of an exchange—and today, most crypto trading platforms meet it. That’s the case regardless of whether they call themselves centralized or decentralized.

Yet these platforms are acting as if they have a choice to comply with our laws. They don’t. Congress gave the Commission a mandate to protect investors, regardless of the labels or technology used. Investors in the crypto markets must receive the same time-tested protections that the securities laws provide in all other markets.

Calling yourself a crypto platform is not an excuse to ignore the securities laws.

Calling yourself a DeFi platform is not an excuse to defy the securities laws.

The supplemental release also provides additional information and requests for comment on the modernized exchange definition. For example, the supplemental release requests comment on communication protocol systems, such as how they’re defined, the role of chat features, and the role of order execution management systems.

The proposal’s modernized exchange definition would include communication protocols in the crypto markets as well. These trading venues provide structured methods to negotiate a trade and function like exchanges. Requiring these exchange-like platforms to comply with our exchange-related rules would help protect investors. The supplemental release further elaborates on this proposed requirement and provides additional economic analysis.

I welcome additional public comment on all aspects of the proposal in light of the information in this supplemental release. I believe that, if adopted, the proposal would promote resiliency, access, and fairness in the markets.

I’d like to thank the members of the SEC staff who worked on this proposal, including:

• Tyler Raimo, Matt Cursio, David Garcia, Eugene Hsia, Megan Mitchell, Amir Katz, Joanne Kim, Haoxiang Zhu, David Saltiel, Andrea Orr, Eric Juzenas, David Shillman, Geeta Dhingra, Joanne Rutkowski, Jo Anne Swindler, Roni Bergoffen, Yue Ding, Sharon Park, and Marilyn Parker in the Division of Trading and Markets;
• Jessica Wachter, Paul Barton, Lauren Moore, Charles Woodworth, Zachery Kiefer, Seung Won Woo, Oliver Richard, Caroline Schulte, Jill Henderson, Woodrow Johnson, Michael Davis, Amy Edwards, Hans Heidle, and Kali Chowdhury in the Division of Economic and Risk Analysis;
• Megan Barbero, Meredith Mitchell, Marie-Louise Huth, Robert Teply, Sean Bennett, Donna Chambers, and David Mendel in the Office of the General Counsel;
• Jonathan Ingram and Andrew Schoeffler in the Division of Corporation Finance;
• Jorge Tenreiro, David Hirsch, and Stephanie Reinhart in the Division of Enforcement;
• Michael Hershaft and Constance Kiggins in the Division of Examinations;
• Daniele Marchesani, Trace Rakestraw, and Lisa Reid in the Division of Investment Management; and
• Valerie Szczepanik in the Office of the Strategic Hub for Innovation and Financial Technology (FinHub).