In the field of digital finance, the rise of decentralized finance (DeFi) and market makers has brought unprecedented impact to the traditional financial system. However, with the expansion of the definition of traders by the U.S. Securities and Exchange Commission (SEC), the future of DeFi and market makers is facing severe tests. New regulations may have a profound impact on this field, forcing many innovative projects and participants to re-examine their operating models and compliance strategies.

In the past few years, the rapid development of DeFi has enabled more and more users to trade, borrow, and even invest without intermediaries. The rise of blockchain technologies such as Ethereum has provided users with higher transparency and liquidity. Market makers have become the main providers of market liquidity, and they make profits through price differences between different exchanges. Such an ecosystem is essentially built on decentralization and openness and transparency, attracting the participation of a large number of investors and users.

However, with the SEC's redefinition of the concept of "trader", the entire ecosystem may be forced to transform. The SEC's recent statement mentioned that any individual or entity involved in digital asset trading, providing liquidity, or conducting transactions may be considered a trader. This change means that participants who used to operate freely in the field of DeFi and market makers may face registration, reporting and compliance requirements. This will undoubtedly increase operating costs and may lead to the exit of many small projects.

Secondly, the operating model of DeFi projects will also be impacted. Many DeFi platforms rely on decentralized liquidity pools and smart contracts to implement transactions, but the implementation of the new regulations may force these projects to make major changes. Take Uniswap as an example. As one of the most popular decentralized exchanges, the providers of its liquidity pools are often ordinary users who do not have professional financial knowledge. If these users are required to follow complex compliance procedures, many may choose to withdraw, resulting in a significant drop in liquidity.

At the same time, the implementation of the new regulations may prompt some DeFi projects to shift from decentralization to centralization in order to better adapt to regulatory requirements. Although this change can solve compliance issues in the short term, it may undermine the core value of DeFi projects in the long run. The charm of decentralized finance lies in removing intermediaries and enabling direct transactions between users, and the centralized operating model runs counter to this concept.

In addition to changes in liquidity and operating models, the SEC's new regulations may also affect investor confidence. Investors are usually more willing to trade in a well-compliant market, but if the market faces uncertainty, they may choose to wait and see. The spread of this sentiment will further increase market volatility and affect trading activity.

For market makers, the new regulatory environment may force them to re-evaluate their business models. In the past, market makers mainly relied on algorithmic trading and high-frequency trading to make profits, but under the new compliance framework, they may need to consider more risk management measures. This also means that market makers will face higher operational pressure, especially in a market environment with insufficient liquidity. At the same time, many market makers may choose to exit the market, resulting in a decrease in the number of market participants, further exacerbating the liquidity crisis.

Of course, the SEC's new regulations are not entirely negative. For those projects and participants who can adapt to regulatory requirements, compliance will bring them more opportunities. With the strengthening of supervision, the market will become more mature and investors will be better protected. This may attract more institutional investors to enter the market, thereby promoting further development of the market.

However, how to balance regulation and innovation remains an urgent problem to be solved. Overly strict regulation may stifle innovation and cause many excellent projects to fail to survive. Therefore, when formulating new regulations, regulators must fully consider the actual situation of the industry to ensure that the new regulations can protect investors without stifling innovation.

Against this background, industry participants also need to actively adapt to the new environment. Both DeFi projects and market makers need to strengthen compliance awareness and establish a sound internal control mechanism to cope with possible regulatory challenges in the future. In addition, cooperation and communication within the industry will become increasingly important. Only through cooperation can we jointly cope with future challenges.

In general, the expansion of the definition of traders by the US SEC has brought huge challenges to DeFi and market makers. Faced with the new regulatory environment, industry participants need to respond flexibly and find new development opportunities. At the same time, regulators should also give enough space for innovation on the premise of protecting investors. Only in this way can the healthy development of the financial market be achieved and the further prosperity of digital finance be promoted.

In the days to come, how the ecology of DeFi and market makers will evolve is still a topic worthy of attention. Perhaps, in the near future, we will see a more mature and standardized digital financial market that can meet regulatory requirements without losing innovative vitality. All of this is waiting for us to explore and practice.

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Coin Circle (120BTc.coM): The draft rules proposed by the U.S. Securities and Exchange Commission (SEC) in March 2022 to expand the definition of "dealer" in the Securities Exchange Act were officially passed by the committee yesterday (6).

The latest rules require proprietary traders and other market participants who frequently trade U.S. Treasury bonds and other stocks and securities to register as broker-dealers with the SEC and become members of self-regulatory organizations to comply with federal securities laws and regulatory obligations.

SEC expands the definition of dealers to include cryptocurrencies and DeFi in the regulatory scope

But as the SEC warned in the initial proposal published in March 2022, this rule also includes market participants who engage in digital asset "securities" transactions and play an important role in providing liquidity. The crypto industry is more worried that the latest rules will impose strict restrictions on the decentralized finance (DeFi) field. According to Coindesk, the SEC stated in the rules: The Commission does not exclude any specific type of securities, including crypto asset securities, from being subject to the final rules. The dealer framework is based on a functional analysis of securities trading activities conducted by an individual, rather than on the type of securities traded.

SEC Chairman Gary
Gensler explained in a statement that the latest rules require firms that engage in "de facto market making activities" to register as dealers or government securities dealers. Liquidity providers that meet one of the following two definitions will be subject to this rule, but those that manage assets worth $50 million or less will be exempt.

 Regularly express trading interests on both sides of the market for the best available price or near the best price for the same security, and communicate and represent them in a manner that is accessible to other market participants;

 Revenue is primarily derived from capturing the bid-ask spread, buying at the bid, selling at the ask, or providing liquidity trading interests by capturing any incentives provided by the trading venue.

The industry is worried that the new rules will kill DeFi, and crypto moms blast

The rule was passed by the SEC committee yesterday with a vote of 3:2. Two of the five members are Republicans - Mark Uyeda and Hester Peirce, known as the crypto mom - voted against it, and it was widely resisted by the crypto industry. Some industry insiders are worried that many entities engaged in DeFi business may find it impossible to register or comply with SEC regulatory requirements.

Uyeda said in a statement earlier today: "According to the Commission's practice, anyone who buys and sells securities as part of their regular business can become a dealer, and the public should pay attention to the huge scope of jurisdiction claimed by the SEC. This change has created additional regulatory confusion for other markets, including crypto asset securities."

Peirce, who has always supported the crypto industry, also believes that the final rule is too broad and has serious flaws. She said: Not surprisingly, the rule hardly takes into account its actual application in the cryptocurrency market. The press release explained that under the final rule, cryptocurrency automatic market makers may have to register as dealers. I would like to ask "How to register as a dealer for software protocols?"

The crypto group DeFi Education Fund, which expressed opposition to the initial proposal, said that the final version was "misguided and unworkable."

"Not only did the SEC fail to address the substance of our concerns, it also completely failed to clarify any obvious compliance path for DeFi market participants. Imposing uncompliable obligations on entities in the DeFi ecosystem is wrong, impractical, and detrimental to innovation."

The new rule will take effect 60 days after publication in the Federal Register and is expected to be officially implemented in April.

In this context, we need to deeply analyze the specific impact of the SEC's new regulations on the market. First, the increase in compliance costs will directly affect the survival of many small market makers. Compared with large institutions, small market makers often lack sufficient resources to cope with complex compliance requirements. This may lead to a reduction in liquidity in the market, which in turn affects the healthy development of the entire trading ecosystem. For example, a small market maker used to rely on low-cost liquidity to provide services, but after the implementation of the new regulations, they had to invest a lot of manpower and material resources to meet compliance requirements, which directly weakened their market competitiveness.