The Commission should withdraw the proposed amendments to Rule 3b-16, recognize that decentralized finance (DeFi) protocols do not constitute covered exchanges requiring registration under a proper functional test, and permit trading systems—including DeFi systems under a voluntary registration framework—to demonstrate the ability to satisfy standards through automated configurations and controls.
I. A Functional Test for Covered Exchange Activity Should Exclude DeFi
The Commission seeks to apply what it considers a “Technology Neutral and Functional Test of the ‘Exchange’ Definition” to DeFi systems, pointing to an assessment that is based on functions performed and not “how an entity may characterize” itself or its technology. From this, the Commission concludes that activities performed using “so-called ‘DeFi’ trading systems,” depending on the facts and circumstances, already could meet the criteria of existing Rule 3b16 and therefore “constitute exchange activity.” In addition, the Commission preliminarily finds that certain DeFi systems would fall under the proposed amended Rule 3b-16. Notably, the Commission in both the Proposing Release and the Reopening Release recognizes that the changes to Rule 3b-16 will result in the rule covering more activity than it otherwise would have, including the activity of some DeFi systems.
Notwithstanding the Commission’s invocation of a functional approach, the application of a bona fide functional test for exchange characteristics to DeFi systems demonstrates that DeFi protocols are not properly considered exchanges subject to the registration required of traditional exchange intermediaries.
