Why the SEC should clarify exchange rules for blockchain apps: A safe harbor for software II

The U.S. Securities and Exchange Commission continues to advance Project Crypto and its ambitious goal of moving U.S. capital markets onchain. In April, the SEC’s Division of Trading and Markets clarified when certain user interfaces may operate without registering as broker-dealers. In June, the SEC proposed rescinding Rule 611 of Regulation NMS, which would remove a significant obstacle to the development of onchain securities markets. And last week, the SEC released its “Innovation Exemption,” exempting certain trading venues — Tokenized Securities Venues (TSVs) — from the definition of “exchange” under the Exchange Act and certain liquidity providers from the definition of “dealer.” Together, these efforts reflect a recognition of the potential of blockchain technology to upgrade the financial system and that onchain markets should not be forced into ill-fitting regulatory models.

The SEC deserves tremendous credit for these actions. But broker clarity and the proposed rescission of Rule 611 address only part of the regulatory uncertainty facing onchain markets. The Innovation Exemption is likewise an important first step, but it only provides an intermediated pathway for bringing securities markets onchain. As Commissioner Peirce noted in her statement on the exemption: “This order is not about decentralized finance. Truly decentralized systems that are driven by automated software do not give rise to the foundational concerns underlying securities regulation.” We agree.