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Why the DeFi world is worried about a push for stronger bond market regulation

April 28, 2022, 9:30 AM UTC

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Wall Street’s top regulator issues a lot of proposals

So when the Securities and Exchange Commission floated a rule in late January to bring some of the biggest players in the U.S. bond market further under its regulatory umbrella, it was easy to overlook it. I admit that I did.  

Agency officials have been talking for years about the need to beef up the rules for trading platforms that handle Treasury bonds, usually by amending the nearly 25-year-old Regulation Alternative Trading System, or Reg ATS. January’s proposal wasn’t even the first time that the SEC proposed the idea. It did something similar in 2020, under then-Chairman Jay Clayton, but it was never finalized.

The newest version of the SEC’s plan is no regular one, though. Or at least not in the eyes of, strangely, cryptocurrency investors, lobbyists, and executives. 

“I’ve been referring to this as probably the biggest rulemaking the SEC has ever done,” says Goodwin partner Nick Losurdo, who previously worked as counsel to former SEC Commissioner Elad Roisman. “And I do mean ever.”

Under the proposal, the SEC would change the definition of what it means to be an exchange—literally, on a technical level. We’ll spare you the details. But the reason why is that regulators, ultimately, want a better look at what they call communication protocol systems, a classification the SEC did not explicitly define in its proposal but cited a request-for-quote platform in the bond market as an example. (Let’s just call these CPSs, shall we?)

And while the 591-page document issued in late January contains no mention of cryptocurrency, the industry and its lawyers have been thrown into a tizzy. Without a clear definition of what a CPS is, “the term would be subject to potentially broad and evolving interpretation by the SEC staff,” according to a February memo from Sidley attorneys. In other words, the way Losurdo sees it, the proposal may represent “a backhanded and backdoor way of the SEC getting at corners of DeFi and crypto that they arguably have no jurisdiction over.”

If that’s the case, the stakes would be high. Should the proposal be enacted, CPSs would need to register as either an exchange like the New York Stock Exchange or as an alternative trading system, which both carry significant upgrades in disclosures, technical requirements, and regulatory guidelines for any sort of crypto trading venue, and especially within DeFi.

“Broadening the definition of an exchange in a manner that could apply to DeFi protocols, at a time when it is unclear which digital assets are considered securities, will create tremendous regulatory uncertainty and deter responsible innovation in the emerging Web3 ecosystem,” the venture capital giant Andreessen Horowitz wrote to the SEC in a 29-page comment letter.

Others that chimed in about the proposal included trade groups like the Blockchain Association, Coinbase, and the DeFi Education Fund, which is funded by the decentralized exchange Uniswap. The Wall Street Journal reported Wednesday that 170 identical letters based on a form posted online hit the SEC’s comment file about the proposal. 

Even SEC Commissioner Hester Peirce, the one Republican currently sitting on the regulator’s top panel, has raised concern, telling Bloomberg in February that “the proposal includes very expansive language, which, together with the chair’s apparent interest in regulating all things crypto, suggests that it could be used to regulate crypto platforms.”

The SEC did not respond to a request for comment from Fortune

SEC Chair Gary Gensler has reiterated as recently as Tuesday that the rule proposal was designed for the giants of the bond markets. “I think it’s important that we consider revisiting the SEC’s rules to reflect the increased use of electronic trading platforms in fixed-income markets,” Gensler said. 

But the crypto industry is concerned nonetheless that the proposal will eventually open DeFi up to more scrutiny, considering Gensler and others on the commission have made it clear already that they see the need for more investor safeguards in it. “Without a common set of conduct expectations, and a functional system to enforce those principles, markets tend toward corruption, marked by fraud, self-dealing, cartel-like activity, and information asymmetries,” SEC Commissioner Caroline Crenshaw wrote in an op-ed in November.

And maybe they’re right. A recent report from Chainalysis found that $1.3 billion was stolen in the crypto ecosystem in the first quarter, with 97% of it hailing from DeFi platforms. Either way, though, it’s unlikely the industry will get the SEC to “show its math” on whether the proposal does or doesn’t apply to DeFi any time soon, Losurdo says. That will have to wait until the regulator finalizes the rule—a matter that can take weeks or months to come to fruition, or never at all.

Declan Harty


Credits 🚀 

Workers may soon be able to invest in crypto through their 401(k)s thanks to the country’s largest retirement plan provider, Fidelity Investments.

Anthony Scaramucci is pivoting SkyBridge Capital into the digital assets market. 

Cathie Wood’s Ark Invest plans to reapply for a spot Bitcoin ETF with the SEC. 

The crypto markets and regulators will soon finally know where Binance’s holding company is based

It's a good time to be a lawyer with some crypto expertise

Debits 🐻 

About $3 million worth of NFTs from the Bored Ape Yacht Club universe was stolen by hackers who gained access to the collection's official Instagram page to pull off the heist.

The New York State Assembly has passed a bill to block new crypto mining facilities that don't use renewable energy sources. 

U.S. authorities have brought down the hammer on Archegos Capital founder Bill Hwang and its former CFO, Patrick Halligan, with charges of racketeering conspiracy and securities fraud.

A new U.S. National Bureau of Economic Research report has found that Bitcoin "is not being widely used as a medium of exchange" in El Salvador.

It's been a rough few days for Dogecoin after the meme token spiked following news that Twitter has agreed to be bought by the world's richest man, Elon Musk.


I'm sorry. What? On Tuesday, the New York Times’ critic at large Amanda Hess published a headline that, candidly, I rolled my eyes at before realizing that they had fallen out of my head and onto the floor. It wasn't that the story was bad—it's actually quite interesting and well done. For me, though, the shock comes more so from the simple fact that we live in a time where the Newspaper of Record is now asking: "Does a Toddler Need an NFT?" 

From the article:

Does your toddler need an NFT? Zigazoo says yes. The app’s mission is to “empower kids to shape the very landscape and infrastructure of NFTs and Web3,” to help them “express themselves through art and practice essential financial literacy skills” and to allow them to grow into “tomorrow’s digital citizens.” As Rebecca Jennings recently reported in Vox, efforts to usher children into the worlds of cryptocurrency, NFTs and blockchain technology are being pitched as “preparing future workers for lucrative jobs in tech.” Traditional children’s entertainment has long angled at extracting maximum cash from its little consumers (soon Pixar will release a gritty origin film featuring the “Toy Story” character Buzz Lightyear), but the slick language suggesting that kids should spend money to make money feels new. Platforms like Zigazoo are building a hype bubble for children and pitching it as a creative outlet, an educational opportunity, even a civic duty to join in.



Between 2019 and 2021, Robinhood, the online brokerage, expanded its count of employees from 700 to almost 3,800 in the throes of a "period of hyper growth" as it looked to keep up with the business’s acceleration, CEO Vlad Tenev wrote in a memo to employees released Tuesday. Well, Robinhood can no longer keep up with its employees. The company is laying off 9% of its full-time workers, a move that was announced just days before it reports earnings. The share price hit a new 52-week low Wednesday of $9.38.


Crypto millionaires are erecting their own tax-free utopias in Central America. The locals aren't happy. by Amiah Taylor

Jack Dorsey bagged a $268 million windfall when Elon Musk rescued failing Twitter by Shawn Tully

Tech-mageddon: Stunning Alphabet miss plunges Nasdaq into bear territory—and to its lowest level since 2020 by Bernhard Warner

You've got one final chance to win a lunch with Warren Buffett by Chris Morris

Coinbase CEO Brian Armstrong says Elon Musk's Twitter buy is 'a great win for free speech' by Taylor Locke

The pandemic ruined their IRL company. So they launched a business in the metaverse. by Marco Quiroz-Gutierrez

The first crypto dating show raised $6 million to build the 'Netflix of Web3' with help from Paris Hilton by Taylor Locke

(Some of these stories require a subscription to access. Thank you for supporting our journalism.)


Welcome to week two of If You Don't Know, Crypto. 

On today's agenda: Proof of work, the consensus mechanism behind the OG crypto Bitcoin known sometimes as POW.

The way POW works, from an exceedingly high level, is that miners race all day and every day to solve complicated mathematical computations using computers that help grow the network and keep it secure. In return for doing so, the miners that crack those problems earn some Bitcoin. Mining Bitcoin was a relatively straightforward endeavor in the crypto market's earliest days, something you could do on a desktop computer. However, mining operations are done at scale in massive facilities nowadays thanks to the market's explosive growth, and, as a result, the subsequent need for massive amounts of energy. It's a situation that has created plenty of headaches for environmental groups, lawmakers, and others who worry about the ecological fallout, especially with some mines still using fossil fuels to charge their operations. Bitcoin supporters argue that the energy consumption is a necessity. But the mining industry is also moving more toward renewable energy as well, particularly as Congress and statehouses across the country ramp up their scrutiny of the practice. Even then, though, there are alternatives to POW, like proof of stake, which the world's second-largest blockchain network, Ethereum, is trying to move to right now. But that we'll have to hold off on exploring that until next week. 

This is the web version of The Ledger, Fortune’s weekly newsletter covering financial technology and cryptocurrency. Sign up here to receive future editions.