Andreessen Horowitz’s crypto arm, a16z, is proposing a safe harbor from SEC exchange registration requirements for qualifying decentralized exchanges and the applications that provide access to them.
The proposal, submitted with the DeFi Education Fund, would create a rebuttable presumption that certain DEXs and DEX Apps are not engaged in exchange activity under the Securities Exchange Act, including when they facilitate peer-to-peer transactions involving tokenized securities.
The proposal comes days after the Securities and Exchange Commission (SEC) granted temporary, conditional relief to certain permissioned venues trading tokenized U.S. stocks. The SEC’s Sept. 17 Innovation Exemption covers Tokenized Securities Venues, or TSVs, that use automated market makers and liquidity pools, but does not establish a general exemption for decentralized finance.
Four conditions for DEXs
Under a16z’s proposal, a DEX would need to satisfy four criteria to qualify for the safe harbor.
Non-custodial: The protocol could not take control of users’ funds, with signing and transaction submission remaining user-initiated.
Automated: Transactions and other system functions would have to execute without human intermediation. No person or commonly controlled group could have unilateral authority to change the system’s functionality, operation, or rules.
Permissionless: The protocol could not restrict access or give another party the ability to restrict access.
Credibly neutral: The system could not provide private permissions or hard-coded privileges that allow someone to discriminate among users or use cases.
a16z said its proposal primarily addresses automated market maker-based DEXs but is not intended to be limited to one technical architecture.
Separate rules for DEX apps
The proposal would impose a different set of requirements on applications that provide interfaces to DEX protocols. DEX Apps would also need to remain non-custodial, with users initiating transaction signing and submission. Their pricing and market data would need to rely on pre-disclosed, objective, and independently verifiable parameters, sourced from public blockchain data or independent third parties.
The apps would also need to operate without a central authority exercising discretion over trade coordination, pricing, matching, or execution in a way that favors particular users or transactions.
Developer involvement would be limited to maintaining the interface, making technical and security updates, and applying objective filters to exclude digital assets. Those filters would have to use publicly disclosed and neutral criteria rather than subjective judgments about an asset’s investment merits.
Proposal follows SEC tokenized-stock relief
The submission follows the SEC’s recent action allowing certain Tokenized Securities Venues to operate outside the statutory definition of an exchange for five years, subject to conditions.
The agency’s relief is limited to tokenized NMS stocks traded in permissioned environments. TSVs must meet requirements covering participant access, tokenized-stock rights, disclosures, smart-contract audits and trading halts, among other conditions.
SEC Commissioner Hester Peirce said the Sept. 17 order was not aimed at decentralized finance and wrote that truly decentralized systems driven by automated software do not raise the same intermediary-related concerns underlying securities regulation.
That distinction forms part of the basis for a16z’s proposal to address DEXs separately from centralized or permissioned trading venues.
a16z also seeks CTP registration framework
a16z submitted a separate proposal for crypto asset trading platforms, or CTPs, that function as traditional intermediaries.
Unlike the DEX safe harbor, that proposal would establish a registration route modeled on the SEC’s alternative trading system framework. It would allow qualifying CTPs to register with the SEC and FINRA and trade crypto asset securities, as well as certain non-security and security/non-security trading pairs.
The proposal would also apply disclosure and recordkeeping requirements, with blockchain-based records permitted under the framework described by a16z.
Proposal draws line between decentralized and intermediated markets
The two submissions seek different regulatory treatment based on how a platform operates.
Under a16z’s approach, a DEX or DEX App meeting the safe-harbor conditions would not need to register as an exchange. Platforms that perform intermediary functions would instead have a registration pathway tailored to crypto markets.
The proposal is a policy recommendation from a16z and the DeFi Education Fund, rather than an SEC rule or exemption. The SEC has not adopted the proposed DEX safe harbor.
The agency is currently accepting public comments on its Innovation Exemption, which is intended to provide temporary relief while the SEC evaluates longer-term rules for on-chain securities trading.
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