U.S. SEC Provides Pathway for DeFi Platforms to Operate Without Broker-Dealer Registration

The U.S. Securities and Exchange Commission (SEC) has outlined conditions under which DeFi platforms that operate through covered user interfaces may be exempt from registering as broker-dealers. This marks the latest guidance from the Commission, even as it continues to provide regulatory clarity ahead of the passage of the CLARITY Act.

SEC Provides Clarity For Crypto User Interfaces

In an SEC release, the Division of Trading and Markets issued guidance for platforms that create, offer, and operate certain covered user interfaces that enable users to prepare transactions in crypto asset securities. The Commission defined these Covered User Interfaces as a website, browser extension, or other software application that may be embedded in a wallet or be available for download separately.

These crypto interfaces assist users in initiating crypto-asset securities transactions on blockchain networks or through blockchain-based smart contracts using their self-custodial wallets. The SEC indicated that this guideline may also apply to crypto swap sites or aggregators that provide users with “market data, such as potential execution routes, asset prices, and estimated transaction costs” for crypto securities transactions.

Furthermore, these Covered User Interfaces may provide educational material to help users set the best parameters for a transaction. The Commission alluded to Section 15(a) of the Exchange Act, which requires brokers that effect securities transactions to register under Section 15(b) of the Act.

Although these crypto interfaces may qualify as brokers, the SEC outlined conditions under which it will not object to their operating without registering as broker-dealers. This includes instances in which the Covered User Interface permits users to customize default crypto asset security transaction parameters and provides educational materials to help them set their desired parameters.

Furthermore, the Commission will not object to these interface providers operating without registering as broker-dealers if they do not solicit investors to engage in any specific securities transactions. Interface providers that select one or more default trading venues may also be exempt. The SEC staff indicated that the focus was on platforms that remain neutral and provide users with an array of options as they seek to execute their securities transactions.

‘Moving Along’ Without the CLARITY Act In Place

Galaxy Digital’s Head of Research, Alex Thorn, stated that the SEC has just shown it can move the crypto market structure along without Congress, which has yet to pass the CLARITY Act. He highlighted that the latest guidance allows certain self-custodial interfaces for crypto asset securities to avoid broker-dealer registration if they remain within strict guardrails.

Thorn added that this guidance also sets the stage for the innovation exemption rules, which SEC Chair Paul Atkins has said are coming soon. This is likely to include possible relief for tokenized securities trading through automated market makers (AMMs) and other decentralized applications.

The Galaxy Digital exec declared that the Commission is already preparing to implement a CLARITY-like regime. However, he explained that the CLARITY Act still needs to be enacted into law because staff guidance is not law, and it could change under future administrations unless Congress codifies it. As CoinGape reported, the Senate will resume discussions about the crypto bill this week.

Thorn stated that they expect the Senate Banking Committee to announce a markup for the crypto bill, possibly in days, with the markup likely occurring within the next two to three weeks. “The clock is ticking,” he concluded.