SEC Urged to Clarify Rules for Decentralized Exchange Protocols

The US Securities and Exchange Commission (SEC) continues to advance Project Crypto, its ambitious goal of moving U.S. capital markets onchain. In recent months, the SEC has clarified user interface rules for certain blockchain apps, proposed rescinding Rule 611 of Regulation NMS, and released an 'Innovation Exemption' that exempted Tokenized Securities Venues (TSVs) from exchange registration requirements.

The SEC deserves credit for these efforts, but more work is needed to address regulatory uncertainty facing onchain markets. A16z crypto recommends clarifying circumstances in which developers of decentralized exchange protocols (DEXs) and apps providing access to them (DEX Apps) fall outside the Exchange Act's exchange registration requirements.

The proposed 'broker safe harbor' would give developers clear standards for determining when DEXs and DEX Apps are not subject to exchange regulation. To qualify, a DEX must meet four criteria: non-custodial, automated, permissionless, and credibly neutral. A DEX App must also meet four criteria: non-custodial, objective and verifiable market data, no discretion, and limited developer role.

This safe harbor would complement the Innovation Exemption and extend regulatory clarity to truly permissionless systems. A16z crypto also submitted a proposal for crypto asset trading platforms (CTPs) that function as traditional intermediaries, recommending a tailored registration framework modeled on alternative trading systems (ATSs).