The agency’s comment window is closing for its proposal to expand how it defines exchanges, including a major swath of decentralized finance, and the crypto sector is objecting.

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The U.S. Securities and Exchange Commission (SEC) wants to stretch how it identifies exchanges it needs to regulate, and the agency’s inbox is jammed with crypto industry letters accusing it of reaching well beyond its legal powers and potentially forcing rules on services the platforms need, such as electric companies.

The most recent re-write of the agency’s exchange proposal in April would explicitly absorb decentralized finance (DeFi) into the world of exchanges subject to SEC rules and oversight, arguing that an updated rule would help modernize the securities regulator’s approach to the changing markets. The SEC set a Tuesday deadline for public input.

But crypto industry advocates and lobbyists argue that the new rule – if finalized – would violate the First Amendment rights of coders and would double down on what they see as the SEC’s ongoing error of failing to treat this sector as something new.

“The proposal would operate as a blanket de facto banishment of DeFi from the United States,” the DeFi Education Fund, a lobbying group, wrote in its comment letter. “The actions and words of the commission and agency personnel have created great confusion.”

The agency’s proposal suggests that protocols designed to bring together buyers and sellers of securities – so-called communication protocol systems – now perform a similar enough role to exchanges that they should be regulated as such.

“Investors in the crypto markets must receive the same time-tested protections that the securities laws provide in all other markets,” said SEC Chair Gary Gensler, when the SEC voted to release the latest version of the proposed rule in April.

However, DeFi protocols “intuitively possess none of the defining hallmarks of stock exchanges,” according to the DeFi Education Fund’s letter. “Beyond DeFi, the commission’s proposal has no logical limit and would sweep third-party and utility service providers who contract with exchange providers into the exchange regulatory regime.”

That could pull key outside services into the SEC’s web, such as messaging services and the utility companies that provide electricity to platforms, the group argued.

Crypto investment firm Paradigm weighed in to defend decentralized exchanges (DEXs) that don’t have the centralized management the securities rules are accustomed to dealing with.

take from: https://cryptonews.com/