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This week, we submitted a comment in response to the SEC’s proposed amendments to Exchange Act Rule 3b-16 regarding the definition of an “exchange.”
We support the SEC taking a technology-neutral approach to assessing whether an organization, association or group meets the definition of an “exchange.” But being technology neutral does not mean treating all technologies the same. Different technologies present different risks and benefits.
Blockchains and smart contracts enable peer-to-peer transactions with self-custody through the use of open, transparent communication protocols. Although these technologies can be used by an organization, association or group to provide a marketplace for securities trading, they do not inherently require the involvement of such an intermediary, nor do they necessarily relate to securities trading.
However, the Reopening Release in connection with the proposed amendments could be read to suggest that parties who use blockchain-based protocols or applications to transact would be required to involve a national securities exchange or alternative trading system (ATS), even if the protocol or application consists of asset-agnostic, open or passive technology operating on a peer-to-peer basis. The Reopening Release does not suggest the same treatment for parties using functionally similar technologies that do not involve blockchain.
We respectfully recommend that the SEC clarify this in order to remain consistent with a technology-neutral approach it espouses, and that the Exchange Act and Administrative Procedure Act require. We respectfully recommend the SEC:
- Not require the designation of an intermediary for peer-to-peer transactions where no intermediary is otherwise involved
- Not treat peer-to-peer transactions more stringently than those involving a broker, dealer or investment adviser
- Not treat blockchain-based protocols differently from other general connectivity communication technologies
The exchange registration requirement is an important one that protects market participants from unfair or inequitable practices by intermediaries. Blockchains, however, enable investors to maintain custody and transfer assets electronically without involving an intermediary. While blockchains permit parties to transmit value over the Internet, including communicating price and quantity, the same is true for many other general purpose Internet-based technologies, such as auction and other e-commerce websites. By requiring parties who use blockchain-based protocols to trade through one or more intermediaries, the proposal would reintroduce the very risks that the SEC is seeking to address in non-blockchain contexts.
We appreciate the opportunity to comment and welcome the opportunity to work constructively with the SEC and its staff on a practical regulatory approach that encourages growth of this nascent technology, while also protecting investors.