Document ID: SEC-2023-0490-0001
Agency: sec
Document Type: Proposed Rule
Title: Definition of Exchange
Posted Date: 2023-05-05T04:00Z

[Federal Register Volume 88, Number 87 (Friday, May 5, 2023)]
[Proposed Rules]
[Pages 29448-29493]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-08544]

[[Page 29447]]

Vol. 88

Friday,

No. 87

May 5, 2023

Part III

Securities and Exchange Commission

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17 CFR Parts 232, 240, 242, et al.

Supplemental Information and Reopening of Comment Period for Amendments 
Regarding the Definition of ``Exchange''; Proposed Rule

  Federal Register / Vol. 88 , No. 87 / Friday, May 5, 2023 / Proposed 
Rules  

[[Page 29448]]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 232, 240, 242, and 249

[Release No. 34-97309; File No. S7-02-22]
RIN 3235-AM45

Supplemental Information and Reopening of Comment Period for 
Amendments Regarding the Definition of ``Exchange''

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule; reopening of comment period.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
reopening the comment period for its proposal (``Proposed Rules'') to 
amend the rule under the Securities Exchange Act of 1934 (``Exchange 
Act'') that defines certain terms used in the statutory definition of 
``exchange.'' The reopening provides supplemental information and 
economic analysis regarding trading systems that trade crypto asset 
securities that would be newly included in the definition of 
``exchange'' under the Proposed Rules. The Commission is requesting 
further information and public comment on certain aspects of the 
Proposed Rules as applicable to all securities and the compliance dates 
and other alternatives for the Proposed Rules. The Proposed Rules were 
set forth in Release No. 34-94062 (``Proposing Release''), and the 
related comment period, which was reopened in Release No. 34-94868 on 
May 9, 2022, ended on June 13, 2022. The reopening of this comment 
period is intended to allow interested persons further opportunity to 
analyze and comment on the Proposed Rules in light of the supplemental 
information provided herein (``Reopening Release'').

DATES: The comment period for the proposed amendments published on 
March 18, 2022, at 87 FR 15496, which was initially reopened on May 12, 
2022, at 87 FR 29059, is again reopened. Comments should be received on 
or before June 13, 2023.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/regulatory-actions/how-to-submit-comments); or
     Send an email to [email protected]. Please include 
File Number S7-02-22 on the subject line.

Paper Comments

     Send paper comments to Secretary, Securities and Exchange 
Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-02-22. This file number 
should be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method of submission. The Commission will post all 
comments on the Commission's website (https://www.sec.gov/rules/proposed.shtml). Comments are also available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Operating conditions may limit access to the 
Commission's Public Reference Room. All comments received will be 
posted without change. Persons submitting comments are cautioned that 
we do not redact or edit personal identifying information from comment 
submissions. You should submit only information that you wish to make 
available publicly.
    Studies, memoranda, or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any materials will 
be made available on the Commission's website. To ensure direct 
electronic receipt of such notifications, sign up through the ``Stay 
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Tyler Raimo, Assistant Director, 
Matthew Cursio, David Garcia, Eugene Hsia, Megan Mitchell, Amir Katz, 
Special Counsels, and Joanne Kim, Attorney Advisor, at (202) 551-5500, 
Office of Market Supervision, Division of Trading and Markets, 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549.

SUPPLEMENTARY INFORMATION: 

I. Background

A. Exchange Regulatory Framework

    Exchange Act section 3(a)(1) states that the term ``exchange'' 
means any organization, association, or group of persons, whether 
incorporated or unincorporated, which constitutes, maintains, or 
provides a market place or facilities for bringing together purchasers 
and sellers of securities or for otherwise performing with respect to 
securities the functions commonly performed by a stock exchange as that 
term is generally understood, and includes the market place and the 
market facilities maintained by such exchange.\1\
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    \1\ See 15 U.S.C. 78c(a)(1).
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    Title 17 section 240.3b-16(a) (``Rule 3b-16(a)'') defines certain 
terms in the definition of ``exchange'' under section 3(a)(1) of the 
Exchange Act to include any organization, association, or group of 
persons that: (1) brings together the orders for securities of multiple 
buyers and sellers; and (2) uses established, non-discretionary methods 
(whether by providing a trading facility or by setting rules) under 
which such orders interact with each other, and the buyers and sellers 
entering such orders agree to the terms of a trade.\2\ Title 17 section 
240.3b-16(b) (``Rule 3b-16(b)'') explicitly excludes certain systems 
from the definition of ``exchange.'' \3\ Title 17 section 240.3b-16 
(``Rule 3b-16'') provides a functional test to assess whether a trading 
platform meets the definition of exchange and, if so, triggers exchange 
registration. Section 5 of the Exchange Act \4\ requires an 
organization, association, or group of persons that meets the 
definition of ``exchange'' under section 3(a)(1) of the Exchange Act, 
unless otherwise exempt, to register with the Commission as a national 
securities exchange pursuant to section 6 of the Exchange Act.\5\
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    \2\ See 17 CFR 240.3b-16(a).
    \3\ See Securities Exchange Act Release No. 40760 (Dec. 8, 
1998), 63 FR 70844, 70852 (Dec. 22, 1998) (``Regulation ATS Adopting 
Release''). Specifically, Rule 3b-16(b) excludes from the definition 
of ``exchange'' systems that perform only traditional broker-dealer 
activities, including: systems that route orders to a national 
securities exchange, a market operated by a national securities 
association, or a broker-dealer for execution, or systems that allow 
persons to enter orders for execution against the bids and offers of 
a single dealer if certain additional conditions are met. 17 CFR 
240.3b-16(b).
    \4\ 15 U.S.C. 78e. Registered national securities exchanges are 
also self-regulatory organizations (``SROs''), and must comply with 
regulatory requirements applicable to both national securities 
exchanges and SROs.
    \5\ 15 U.S.C. 78f.
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    Title 17 section 240.3a1-1(a)(2) (``Rule 3a1-1(a)(2)'') exempts 
from the Exchange Act section 3(a)(1) definition of ``exchange'' an 
organization, association, or group of persons that complies with 
Regulation ATS, which requires, among other things, meeting the 
definition of an alternative trading system (``ATS'') and registering 
as a broker-dealer.\6\ As a result of the exemption, an organization, 
association, or group of persons that meets the definition of an 
exchange and complies with Regulation ATS is not required by section 5 
of the Exchange Act to register

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as a national securities exchange pursuant to section 6 of the Exchange 
Act, is not an SRO, and, therefore, is not required to comply with the 
regulatory requirements applicable to national securities exchanges and 
SROs.\7\
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    \6\ ``Regulation ATS'' consists of 17 CFR 242.300 through 
242.304 (Rules 300 through 304 under the Exchange Act).
    \7\ An ATS that fails to comply with the requirements of 
Regulation ATS would no longer qualify for the exemption provided 
under Rule 3a1-1(a)(2), and thus, risks operating as an unregistered 
exchange in violation of section 5 of the Exchange Act. See 
Securities Exchange Act Release No. 83663 (July 18, 2018), 83 FR 
38768, 38772 n.36 (Aug. 7, 2018) (``NMS Stock ATS Adopting 
Release'').
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B. January 2022 Proposed Amendments to Exchange Act Rule 3b-16

    As described more fully in the Proposing Release,\8\ the Commission 
proposed to amend Exchange Act Rule 3b-16 to, among other things, 
replace ``orders'' with ``trading interest'' and define ``trading 
interest''; \9\ remove the term ``multiple'' before ``buyers and 
sellers''; \10\ add ``communication protocols'' as an example of an 
established, non-discretionary method that an organization, 
association, or group of persons can provide to bring together buyers 
and sellers of securities; simplify and align the rule text with the 
statutory definition of ``exchange'' under section 3(a)(1) of the 
Exchange Act; and add an exclusion under Exchange Act Rule 3b-16(b) for 
systems that allow an issuer to sell its securities to investors.
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    \8\ See Securities Exchange Act Release No. 94062 (Jan. 26, 
2022), 87 FR 15496 (Mar. 18, 2022). The Proposed Rules also: (1) re-
proposed amendments to Regulation ATS for ATSs that trade government 
securities as defined under section 3(a)(42) of the Exchange Act or 
repurchase and reverse repurchase agreements on government 
securities (``Government Securities ATSs''); (2) proposed amendments 
to Form ATS-N for NMS Stock ATSs and Government Securities ATSs; (3) 
proposed amendments to 17 CFR 242.301(b)(5) (``Rule 301(b)(5)'') of 
Regulation ATS (``Fair Access Rule'') for ATSs; (4) proposed to 
require electronic filing of and to modernize Form ATS and Form ATS-
R; and (5) re-proposed amendments to regulations regarding systems 
compliance and integrity to apply to ATSs that meet certain volume 
thresholds in U.S. Treasury Securities or in a debt security issued 
or guaranteed by a U.S. executive agency, or government-sponsored 
enterprise.
    \9\ As proposed, ``trading interest'' (defined in proposed Rule 
300(q) of Regulation ATS) would include ``orders,'' as the term is 
defined under 17 CFR 240.3b-16(c) (``Rule 3b-16(c)''), or any non-
firm indication of a willingness to buy or sell a security that 
identifies at least the security and either quantity, direction (buy 
or sell), or price. See Proposing Release at 15540.
    \10\ The Commission proposed removing the word ``multiple'' from 
Exchange Act Rule 3b-16(a)(1) to mitigate confusion as to its 
application to non-firm trading interest, including request-for-
quote (``RFQ'') systems, and align the rule more closely with the 
statutory definition of ``exchange,'' which does not contain the 
word ``multiple'' but includes the plural terms ``purchasers and 
sellers.'' See id. at 15506. The Commission also stated in the 
Proposing Release that the use of plural terms in ``buyers and 
sellers'' in Rule 3b-16(a) and ``purchasers and sellers'' in the 
statutory definition of ``exchange'' makes sufficiently clear that 
an exchange need only have more than one buyer and more than one 
seller participating on the system to meet this prong. See id. at 
15506 n.105.
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    Specifically, the Commission proposed to amend Exchange Act Rule 
3b-16(a) to include within the definition of ``exchange'' an 
organization, association, or group of persons that constitutes, 
maintains, or provides a market place or facilities for bringing 
together buyers and sellers of securities or for otherwise performing 
with respect to securities the functions commonly performed by a stock 
exchange if it is not subject to an exception under Rule 3b-16(b) and 
it: (1) brings together buyers and sellers of securities using trading 
interest; and (2) makes available established, non-discretionary 
methods (whether by providing a trading facility or communication 
protocols, or by setting rules) under which buyers and sellers can 
interact and agree to the terms of a trade. For purposes of this 
Reopening Release, trading systems that meet the criteria of Exchange 
Act Rule 3b-16(a), as proposed to be amended (i.e., offer the use of 
non-firm trading interest and provide non-discretionary protocols),\11\ 
are referred to throughout the release as ``New Rule 3b-16(a) 
Systems.'' New Rule 3b-16(a) Systems would be subject to the definition 
of ``exchange'' and be required to register as a national securities 
exchange or comply with the conditions to an exemption to such 
registration, such as Regulation ATS.
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    \11\ Such systems were referred to as ``Communication Protocol 
Systems'' in the Proposing Release. See id. at 15497 n.5.
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C. Purpose of the Reopening Release

    In response to the Proposing Release, the Commission received many 
comments.\12\ In particular, the Commission received requests for 
information about the application of the Proposed Rules to trading 
systems for crypto asset securities \13\ and trading systems that use 
distributed ledger or blockchain technology (broadly referred to as 
``DLT''),\14\ including systems commenters characterize as 
decentralized finance or ``DeFi.'' \15\ Commenters request information 
about whether and how such systems can comply with existing federal 
securities laws and the Proposed Rules.\16\ Given these comments, the 
Commission is issuing this Reopening Release regarding the potential 
effects of the proposed amendments to Exchange Act Rule 3b-16 on 
trading systems for crypto asset securities and trading systems using 
DLT, including systems commenters characterize as various forms of 
``DeFi,'' and requesting further information and public comment on 
aspects of the Proposed Rules, more generally. This Reopening Release 
also supplements the economic analysis in the Proposing Release by 
providing additional analysis on the estimated impact of the Proposed 
Rules on trading systems for crypto asset securities and those using 
DLT, which include various so-called ``DeFi'' trading systems, and 
requests further comment.
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    \12\ See infra sections II.A and II.B. Comment letters cited in 
this Reopening Release are comment letters received in response to 
the Proposing Release, which are available at https://www.sec.gov/comments/s7-02-22/s70222.htm.
    \13\ See infra note 26.
    \14\ The terms DLT and blockchain, a type of DLT, generally 
refer to databases that maintain information across a network of 
computers in a decentralized or distributed manner. Blockchain 
networks commonly use cryptographic protocols to ensure data 
integrity. See, e.g., World Bank Group, ``Distributed Ledger 
Technology (DLT) and Blockchain,'' FinTech Note No. 1 (2017), 
available at https://openknowledge.worldbank.org/bitstream/handle/10986/29053/WP-PUBLIC-Distributed-LedgerTechnology-and-Blockchain-Fintech-Notes.pdf?sequence=1&isAllowed=y.
    \15\ Commenters vary in their definitions of ``DeFi,'' or what 
makes a product, service, arrangement or activity ``decentralized.'' 
See generally The Board of the International Organization of 
Securities Commissions, IOSCO Decentralized Finance Report (Mar. 
2022) (``IOSCO Decentralized Finance Report''), available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD699.pdf. Trading systems 
for crypto assets that are colloquially referred to as 
``decentralized'' typically combine more traditional technology 
(such as web-based systems that accept and display orders and 
servers that store orders) with distributed ledger technology (such 
as ``smart contract'' provisioned blockchains--self-executing code 
run on distributed ledgers that carry out ``if/then'' type 
computations). See id. at 1. See also infra note 44.
    \16\ See, e.g., infra notes 25, 58, 80, 82-84, and 86-87.
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II. Exchange Activity Involving Crypto Asset Securities and DLT Under 
the Proposed Rules

A. Crypto Asset Securities

    Commenters reflecting a broad range of market participants shared 
feedback on the application of the Proposed Rules to all securities, 
including crypto assets that are securities. Some commenters agree with 
the Commission's view \17\ that the Proposed Rules should apply to 
trading in any type of security, regardless of the specific technology 
used to issue and/or transfer the security.\18\ Several commenters 
request

[[Page 29450]]

that the Commission clarify whether the Proposed Rules apply to crypto 
asset securities.\19\ Commenters point to the lack of any explicit 
references in the Proposing Release to systems that trade crypto asset 
securities, including so-called ``DeFi'' trading systems, with some 
suggesting that such systems would be outside the scope of the Proposed 
Rules.\20\ One commenter states that the Proposed Rules should not 
apply to crypto asset securities.\21\ Some commenters state their view 
that there is supposed regulatory uncertainty as to which crypto assets 
are securities.\22\ Some commenters state that as a result of such 
supposed uncertainty, it is unclear whether the Proposed Rules would 
apply to so-called ``DeFi'' protocols.\23\ One commenter states that 
the Commission should defer action on any rulemaking impacting crypto 
assets until, among things, such supposed uncertainty is 
eliminated.\24\ Some commenters state that the existing exchange 
regulatory framework is incompatible with systems that trade crypto 
asset securities using so-called ``DeFi protocols.'' \25\
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    \17\ See Proposing Release at 15503.
    \18\ See, e.g., Letters from Marcia E. Asquith, Executive Vice 
President, Board and External Relations, FINRA, dated Apr. 19, 2022 
(``FINRA Letter'') at 4; Stephen W. Hall, Legal Director and 
Securities Specialist, and Scott Farnin, Legal Counsel, Better 
Markets, Inc., dated Apr. 18, 2022 (``Better Markets Letter'') at 8; 
Tyler Gellasch, Executive Director, Healthy Markets Association, 
dated June 13, 2022 (``Healthy Markets Letter'') at 6 n.21 (stating 
that the Proposed Rules should apply only to crypto assets that meet 
the definition of a security under the Exchange Act ``to avoid 
unnecessarily creating regulatory inconsistencies and loopholes, and 
fulfill its investor protection mandate'').
    \19\ See, e.g., Letters from Jai Ramaswamy, Chief Legal Officer 
and Miles Jennings, General Counsel, a16zCrypto, A.H. Capital 
Management, LLC, dated Apr. 18, 2022 (``a16z Letter'') at 3; Kristin 
Smith, Executive Director and Jake Chervinsky, Head of Policy, 
Blockchain Association, dated Apr. 18, 2022 (``Blockchain 
Association Letter II'') at 7-8; Brett Kitt, Associate Vice 
President, Principal Associate General Counsel, Nasdaq, Inc., dated 
Apr. 18, 2022 (``Nasdaq Letter'') at 5; Joanna Mallers, Secretary, 
FIA Principal Traders Group, dated Apr. 21, 2022 (``FIA PTG 
Letter'') at 2; Sheila Warren, Chief Executive Officer, Crypto 
Council for Innovation, dated Apr. 18, 2022 (``Crypto Council 
Letter'') at 2; Sasha Hodder, Hodder Law Firm, P.A., dated Feb. 25, 
2022; Tim Lau, dated Apr. 4, 2022; Zachary Stinson, dated Apr. 18, 
2022 (``Stinson Letter''); Karthik Mahalingam, dated Apr. 19, 2022.
    \20\ See, e.g., Letters from Michelle Bond, Chief Executive 
Officer, Association for Digital Asset Markets, dated Apr. 18, 2022 
(``ADAM Letter II'') at 14; Gus Coldebella and Gregory Xethalis, 
dated Apr. 18, 2022 (``Coldebella and Xethalis Letter'') at 1-2; 
Crypto Council Letter at 3; a16z Letter at 7.
    \21\ See ADAM Letter II at 3, 9-12.
    \22\ See, e.g., a16z Letter at 3, 15-16 (stating that the 
Commission has not made clear which digital assets it believes are 
``securities''); Blockchain Association Letter II at 3, 9 (stating 
whether and when a given digital asset may qualify as a security 
under federal securities laws remains unclear); Letter from LeXpunK, 
dated Apr. 18, 2022 (``LeXpunK Letter'') at 2 n.4 (stating that 
given the ``lack of clarity with respect to the Commission's 
classification of digital assets and transactions involving digital 
assets,'' ``there remains a looming uncertainty as to whether the 
same would be regarded as securities and securities transactions, 
respectively'').
    \23\ See, e.g., a16z Letter at 3, 15-16 (stating that given the 
uncertainty on which digital assets are ``securities,'' some so-
called ``DeFi systems or protocols'' that do not clearly meet the 
definition of ``Communication Protocol Systems'' or facilitate 
transactions in digital assets could endeavor to comply with the 
Proposed Rules while other ``DeFi systems or protocols'' might not, 
which raises the danger of inconsistency and could create unforeseen 
consequences in the market for digital assets); Blockchain 
Association Letter II at 3, 9 (stating that given the Commission's 
``expansive view of what may be deemed a security, there remains a 
risk that certain digital assets that users trade through 
Decentralized Protocols may (ex post) be deemed by the [Commission] 
to be securities''). See also Damien G. Scott, Deputy General 
Counsel, CoinList, dated Apr. 18, 2022 (``CoinList Letter'') at 1-2 
(explaining that crypto asset industry needs clarity about how the 
rules written for traditional paper securities secured and validated 
by intermediaries apply in practice to new digital technology).
    \24\ See Letter from Jay H. Knight, Chair of the Federal 
Regulation of Securities Committee, Federal Regulation of Securities 
Committee of the Business Law Section of the American Bar 
Association, dated Apr. 18, 2022 (``ABA Letter'') at 5-6 (suggesting 
the Commission defer the application of the Proposed Rules to 
digital asset intermediaries and their underlying technology pending 
completion of coordination among a broad range of government 
agencies to develop an appropriate approach to digital assets, 
pursuant to the Executive Order on Ensuring the Responsible 
Development of Digital Assets).
    \25\ See, e.g., a16z Letter at 9 (``But even casting aside the 
practical challenges that DeFi protocols would confront in 
attempting to follow Regulation ATS, the Commission seems to 
overlook the fact that the purposes behind Regulation ATS would not 
be served by imposing its requirements on DeFi protocols.''); Letter 
from William C. Hughes, Senior Counsel & Director of Global 
Regulatory Matters, ConsenSys Software Inc., dated Apr. 14, 2022 
(``ConsenSys Letter'') at 8 (``The '34 Act's requirements, tailored 
as they are to the centralized nature of exchanges, make no sense 
when applied to decentralized blockchain-based systems.''); Letter 
from Delphi Digital, dated Apr. 18, 2022 (``Delphi Digital Letter'') 
at 6 (stating that ``systems lacking order-book logic, or which are 
sufficiently decentralized (i.e., lacking any particular owner/
operator who could rationally be expected to comply with the SEC's 
intermediaries-based regulatory regime)'' have been viewed by 
participants in the digital asset marketplace as outside the scope 
of securities exchange regulation). One commenter cites a paper 
stating that ``[s]ome characteristics of DeFi may be incompatible 
with the existing regulatory framework, particularly given that the 
current framework is designed for a system that has financial 
intermediaries at its core.'' See Letter from Jake Chervinsky, Head 
of Policy, Blockchain Association and Miller Whitehouse-Levine, 
Policy Director, DeFi Education Fund, dated June 13, 2022 
(``Blockchain Association/DeFi Education Fund Letter'') at 4 (citing 
Org. for Econ. Cooperation and Dev., Why Decentralised Finance 
(DeFi) Matters and the Policy Implications (2022) at 12).
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    Crypto assets \26\ generally use DLT as a method to record 
ownership and transfers.\27\ Further, a crypto asset that is a security 
is not a separate type or category of security (e.g., NMS stock, 
corporate bond) for purposes of federal securities laws based solely on 
the use of DLT. The definition of ``exchange'' under section 3(a)(1) of 
the Exchange Act and existing Rule 3b-16 thereunder, and the 
requirement that an exchange register with the Commission pursuant to 
section 5 of the Exchange Act, apply to all securities, including 
crypto assets that are securities, which include investment contracts 
or any other type of security.\28\ The Commission understands that 
currently certain trading systems for crypto assets, including so-
called ``DeFi'' systems, operate like an exchange as defined under 
federal securities laws--that is, they bring together orders of 
multiple buyers and sellers using established, non-discretionary 
methods (by providing a trading facility, for example) under which such 
orders interact and the buyers and sellers entering such orders agree 
upon the terms of a trade.\29\ Because it is unlikely that systems 
trading a large number of different crypto assets are not trading any 
crypto assets that are securities,\30\ these

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systems likely meet the current criteria of Exchange Act Rule 3b-16(a) 
and are subject to the exchange regulatory framework.\31\ Indeed, the 
President's Executive Order on Ensuring Responsible Development of 
Digital Assets acknowledged that ``many activities involving digital 
assets are within the scope of existing domestic laws and regulations'' 
and systems trading such assets ``should, as appropriate, be subject to 
and in compliance with regulatory and supervisory standards that govern 
traditional market infrastructures and financial firms.'' \32\ The 
proposed amendments to Exchange Act Rule 3b-16 do not change any 
existing obligation for these systems to register as a national 
securities exchange or comply with the conditions to an exemption to 
such registration, such as Regulation ATS.\33\
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    \26\ For purposes of this Reopening Release, the Commission does 
not distinguish between the terms ``digital asset securities'' and 
``crypto asset securities.'' The term ``digital asset'' refers to an 
asset that is issued and/or transferred using distributed ledger or 
blockchain technology, including, but not limited to, so-called 
``virtual currencies,'' ``coins,'' and ``tokens.'' See Securities 
Exchange Act Release No. 90788 (Dec. 23, 2020), 86 FR 11627, 11627 
n.1 (Feb. 26, 2021) (``Commission Statement on Custody of Digital 
Asset Securities by Special Purpose Broker-Dealers''). A digital 
asset may or may not meet the definition of a ``security'' under the 
federal securities laws. See, e.g., Report of Investigation Pursuant 
to Section 21(a) of the Securities Exchange Act of 1934: The DAO, 
Securities Exchange Act Release No. 81207 (July 25, 2017) (``DAO 
21(a) Report''), available at https://www.sec.gov/litigation/investreport/34-81207.pdf. See also SEC v. W.J. Howey Co., 328 U.S. 
293 (1946). To the extent digital assets rely on cryptographic 
protocols, these types of assets also are commonly referred to as 
``crypto assets.''
    \27\ See Investment Advisers Act Release No. 6240 (Feb. 15, 
2023), 88 FR 14672, 14676 n.25 and accompanying text (Mar. 9, 2023); 
Securities Exchange Act Release No. 96496 (Dec. 14, 2022), 88 FR 
5440, 5448 n.94 and accompanying text (Jan. 27, 2023).
    \28\ Section 3(a)(1) of the Exchange Act and Rule 3b-16 
thereunder do not apply to market places or facilities that do not 
trade securities. This would also remain unchanged under Exchange 
Act Rule 3b-16, as proposed to be amended.
    \29\ In addition to its exchange obligations, depending on the 
facts and circumstances, an organization, association, or group of 
persons engaging in crypto asset securities business may also have 
legal and regulatory obligations under the federal securities laws 
for broker-dealer, custodial, clearing, or lending activities, among 
others. See U.S. Securities and Exchange Commission v. Beaxy 
Digital, Ltd., et al., No. 23-cv-1962 (N.D. Ill. Mar. 29, 2023) 
(Docket Entries 1, 4) (final judgment entered on consent enjoining 
crypto asset trading platform from operating an unregistered 
exchange, broker, and clearing agency).
    \30\ See Fin. Stability Oversight Council, Report on Digital 
Asset Financial Stability Risks and Regulation 119 (2022) (``FSOC 
Report'') at 97, available at https://home.treasury.gov/system/files/261/FSOC-Digital-Assets-Report-2022.pdf. Each system should 
analyze whether the crypto assets that it offers for trading meet 
the definition of a security under the federal securities laws and 
prior Commission statements. See supra note 26. The Commission will 
continue to evaluate whether currently operating systems are acting 
consistent with federal securities laws and the rules thereunder.
    \31\ See, e.g., DAO 21(a) Report at 17 (``The Platforms that 
traded DAO Tokens appear to have satisfied the criteria of Rule 3b-
16(a) and do not appear to have been excluded from Rule 3b-
16(b).''); In the Matter of Zachary Coburn, Securities Exchange Act 
Release No. 84553 (Nov. 8, 2018) (settled cease-and-desist order); 
In the Matter of Poloniex, LLC, Securities Exchange Act Release No. 
92607 (Aug. 9, 2021) (settled cease-and-desist order).
    \32\ See President's Executive Order on Ensuring Responsible 
Development of Digital Assets, dated Mar. 9, 2022, available at 
https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/.
    \33\ 17 CFR 242.300 through 242.304.
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    The Commission preliminarily believes that some amount of crypto 
asset securities trade on New Rule 3b-16(a) Systems, and that such 
systems may use DLT or be ``DeFi'' trading systems, as described by 
some commenters. Depending on facts and circumstances, systems that 
offer the use of non-firm trading interest and provide non-
discretionary protocols to bring together buyers and sellers of crypto 
assets securities \34\ can perform a market place function like that of 
an exchange--that is, they allow participants to discover prices, find 
liquidity, locate counterparties, and agree upon terms of a trade for 
securities. The exchange regulatory framework would provide market 
participants that use New Rule 3b-16(a) Systems for crypto asset 
securities with transparency, fair and orderly markets, and investor 
protections that apply to today's registered exchanges or ATSs.\35\ 
These benefits, in turn, promote capital formation, competition, and 
market efficiencies.\36\ An organization, association, or group of 
persons that constitutes, maintains, or provides a market place or 
facilities for bringing together purchasers and sellers of crypto asset 
securities or performs with respect to crypto asset securities the 
functions commonly performed by a stock exchange as that term is 
generally understood under the criteria of Exchange Act Rule 3b-16(a), 
as proposed to be amended, would be an exchange under section 3(a)(1) 
of the Exchange Act and would be required to register as a national 
securities exchange or comply with the conditions of Regulation ATS.
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    \34\ See Proposing Release at 15503.
    \35\ See Regulation ATS Adopting Release at 70847.
    \36\ See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    Some commenters question the application of the proposed amendments 
to Exchange Act Rule 3b-16 to assets that may not be securities.\37\ In 
addition, commenters indicate that many crypto asset trading systems 
offer pairs trading,\38\ which typically involves two crypto assets 
(which may or may not be securities) that can be exchanged directly for 
each other using their relative price (``trading pair'').\39\ Trading 
pairs consist of both a base and quote asset; the base asset is the 
asset quoted in terms of the value of the other (i.e., quote) asset in 
the trading pair.\40\ Today, trading pairs can include a combination of 
securities and non-securities and frequently include so-called 
stablecoins, bitcoin, or ether as the base asset, quote asset, or 
both.\41\ Users entering a trading pair on a system can exchange one 
crypto asset for another without exchanging the crypto asset for U.S. 
dollars (or other fiat currency) by simultaneously selling one asset 
while buying another on the system without exchanging either crypto 
asset for U.S. dollars first.
---------------------------------------------------------------------------

    \37\ See ADAM Letter II at 9 (stating that ``it is premature of 
the SEC to include digital assets within the scope of the exchange 
regulatory framework until such time as there is a better 
understanding regarding the appropriate regulatory approach for such 
assets''); LeXpunK Letter at 2 n.4 (stating ``where digital asset 
transactions do not involve securities, U.S. securities laws (and 
the instant proposed rulemaking) would be inapplicable'' and that 
``in light of the lack of clarity with respect to the Commission's 
classification of digital assets and transactions involving digital 
assets, however, there remains a looming uncertainty as to whether 
the same would be regarded as securities and securities 
transactions, respectively''); a16z Letter at 15-16 (stating that 
the Proposing Release ``does not mention `digital asset securities' 
or `investment contracts,' two of the terms the Commission uses to 
describe digital assets believed to be securities'' and that the 
``omissions will further compound the uncertainty over whether the 
Proposal was meant to cover digital assets'').
    \38\ See LeXpunK Letter at 4 and 4 n.19; Delphi Digital Letter 
at 7 (stating that, in the context of systems that use ``technology 
in DeFi,'' automated market makers (``AMMs'') use ``liquidity 
pools,'' which ``represents assets in (and a market for) a single 
token pair'' that are `` `locked' within smart contracts'').
    \39\ See Fan Fang, Carmine Ventre, Michail Basios et al., 
Cryptocurrency Trading: A Comprehensive Survey, 8 Fin. Innovation 13 
(2022), available at https://doi.org/10.1186/s40854-021-00321-6 
(stating that in general, pairs trading involves two similar assets 
with a stable long-run relationship and slightly different spreads, 
and if the spread widens, investors short the high-priced crypto 
asset and buy the low-priced crypto asset).
    \40\ See A Review of Cryptoasset Market Structure and Regulation 
in the United States, Feb. 2023, Program on International Financial 
Systems, available at https://www.pifsinternational.org/cryptoasset-market-structure-and-regulation-in-the-u-s/ (``PIFS Crypto 
Review'').
    \41\ Crypto asset trading pairs offered by trading systems today 
also include other combinations (e.g., crypto asset (security or 
non-security) for another crypto asset (security or non-security)). 
While some of the major crypto asset trading systems available in 
the U.S. allow trading in U.S. dollars, others only allow trading 
between different crypto assets and not fiat currencies. The main 
base asset used on certain of these other systems is Tether (USDT). 
See Igor Makarov & Antoinette Schoar, Trading and Arbitrage in 
Cryptocurrency Markets, 135 J. Fin. Econ. 293 (2020). See also PIFS 
Crypto Review at 10-11 (stating that most global bitcoin trading is 
conducted with stablecoins rather than fiat currency).
---------------------------------------------------------------------------

    Section 3(a)(1) of the Exchange Act and Rule 3b-16 state that an 
exchange is any organization, association, or group of persons which 
constitutes, maintains, or provides a market place or facilities for 
bringing together purchasers and sellers of securities or for otherwise 
performing with respect to securities the functions commonly performed 
by a stock exchange as that term is generally understood.\42\ An 
organization, association, or group of persons that meets the criteria 
of existing Exchange Act Rule 3b-16(a), and Rule 3b-16(a), as proposed 
to be amended, and makes available for trading a security and a non-
security would meet the definition of ``exchange'' notwithstanding the 
fact that the entity traded non-securities. For its securities 
activities, the organization, association, or group of person must 
register as a national securities exchange or comply with the 
conditions of Regulation ATS.\43\ Market places or facilities of, and 
the functions performed by, national securities exchanges and ATSs 
trade only securities quoted in and paid for in U.S. dollars.
---------------------------------------------------------------------------

    \42\ See 15 U.S.C. 78c(a)(1).
    \43\ Section 5 of the Exchange Act states that ``[i]t shall be 
unlawful for any . . . exchange, directly or indirectly, to make use 
of the mails or any means or instrumentality of interstate commerce 
for the purpose of using any facility of an exchange within or 
subject to the jurisdiction of the United States to effect any 
transaction in a security, or to report any such transaction, unless 
such exchange (1) is registered as national securities exchange 
under [section 6 of the Exchange Act], or (2) is exempted from such 
registration . . . .'' See 15 U.S.C. 78e.
---------------------------------------------------------------------------

    The Commission is soliciting additional comment on Rule 3b-16, as 
proposed to be amended, and in

[[Page 29452]]

particular responses to the following questions:
    1. Should a New Rule 3b-16(a) System that trades crypto asset 
securities have the choice of registering as a national securities 
exchange or complying with the conditions of Regulation ATS? Why or why 
not?
    2. Please describe any trading systems that currently offer the use 
of non-firm trading interest and provide non-discretionary protocols to 
bring together buyers and sellers of crypto asset securities, including 
a description of trading interest used, functionalities or protocols, 
requirements, limitations, types of market participants that use the 
systems, transaction volume, crypto asset securities offered for 
trading, and any other services offered by the system. Please provide 
any data, literature, or other information that you consider relevant 
to the Commission's analysis of New Rule 3b-16(a) Systems for crypto 
asset securities, including but not limited to, the types of systems, 
the amount of trading volume on such systems, the number of 
participants on such systems (as well as the participant types, such as 
institutional and retail), and the types of crypto asset securities 
they trade.
    3. Do organizations, associations, or groups of persons that meet 
the criteria of New Rule 3b-16(a) Systems and trade crypto asset 
securities quote a security in an asset other than in U.S. dollars, 
such as a non-security crypto asset, and provide for the purchase or 
sale of that asset on the system or off-system? How do investors and 
trading systems use pairs trading involving non-security crypto assets 
and crypto asset securities? Are there significant differences between 
investors' use of pairs trading on centralized trading systems versus 
trading systems that commenters describe as ``DeFi''? Please explain. 
For example, approximately how much trading volume for crypto asset 
securities is executed using trading pairs on various types of 
platforms discussed above? What percentage of trading in crypto asset 
securities, in terms of volume executed, is in exchange for U.S. 
dollars? Please provide any data, literature, or other information that 
you consider relevant to the Commission's analysis.

B. Exchange Activity Using DLT, Including ``DeFi'' Systems

1. Technology Neutral and Functional Test of the ``Exchange'' 
Definition
    The Commission received comments regarding whether the proposed 
amendments to Exchange Act Rule 3b-16 were intended to apply to what 
commenters characterize as ``DeFi,'' and comments stating that the 
Proposed Rules could be interpreted to cover a broad range of 
technologies, including technologies used by so-called ``DeFi'' trading 
systems.\44\ Some commenters state that so-called ``DeFi'' trading 
systems should be excluded from Exchange Act Rule 3b-16(a), as proposed 
to be amended.\45\
---------------------------------------------------------------------------

    \44\ See, e.g., ConsenSys Letter at 8-9 (requesting that any 
final rule make clear that ``blockchain-based systems'' would not be 
exchanges); a16z Letter at 1, 2, 28 (stating, among other things, 
that the Proposed Rules could be interpreted as applying to a broad 
array of technologies, including ``DeFi systems and protocols''); 
Crypto Council Letter at 2, 4 (stating, in part, that the Proposed 
Rules could apply to the ``crypto and decentralized finance 
markets''); LeXpunK Letter at 3 (stating, in part, its belief that 
many ``DeFi protocols and applications'' would meet the definition 
of a ``communication protocol system'' under the Proposed Rules); 
Global Digital Asset & Cryptocurrency Association, dated Apr. 18, 
2022 (``GDCA Letter II'') at 11 (questioning whether ``decentralized 
exchanges'' would fall under the definition of ``exchange''); Letter 
from Miller Whitehouse-Levine, Policy Director, DeFi Education Fund, 
dated Apr. 18, 2022 (``DeFi Education Fund Letter'') at 3, 15 
(stating, in part, that, without clarification, the Proposed Rules 
could be interpreted to regulate certain ``DeFi protocols''); Letter 
from Dante Disparte, Chief Strategy Officer and Head of Global 
Policy, Circle internet Financial, LLC, dated Apr. 18, 2022 
(``Circle Letter'') at 3; Letter from Michelle Bond, Chief Executive 
Officer, Association for Digital Asset Markets, dated Feb. 2, 2022 
(``ADAM Letter I'') at 1-2 (stating that the Proposed Rules could 
expand Commission authority over ``spot digital asset markets and 
peer-to-peer decentralized networks'' in ways not discussed in the 
Proposing Release); Letter from Kimberly Unger, The Security Traders 
Association of New York, dated Feb. 3, 2022 (``STANY Letter'') at 2; 
Letter from Andrew Vollmer, Mercatus Center at George Mason 
University, dated Mar. 11, 2022 (``Vollmer Letter'') at 2. Two 
commenters also state their belief that there is a lack of clarity 
as to the application of the Proposed Rules to ``decentralized 
finance'' or ``DeFi protocols'' that raises administrative due 
process concerns for industry participants. See ConsenSys Letter at 
18; DeFi Education Fund Letter at 19. The foregoing commenters 
describe systems that use DLT with varying definitions and 
terminology (some of which the commenters do not define). As 
discussed above, there is no generally agreed upon definition of 
``DeFi'' or decentralization. See IOSCO Decentralized Finance Report 
at 1, 9. Nonetheless, as discussed below, the Proposed Rules, like 
the existing exchange framework, regulate exchange activity, and not 
the technology underlying such activity.
    \45\ See, e.g., a16z Letter at 3 (stating that ``DeFi protocols 
eliminate the need for a central operator that could implement 
regulatory requirements applicable to traditional securities 
exchanges or broker-dealers'' and therefore the Commission should 
``clarify that the [p]roposal does not apply to DeFi systems by 
explicitly excluding them''); LeXpunK Letter at 2 (stating that the 
Proposed Rules would improperly expand the Commission's authority to 
regulate ``technologists with neither the resources nor the 
reasonable expectation of being so regulated, who `make available' 
peer-to-peer `communication protocols' used in DeFi''); ConsenSys 
Letter at 8-12 (stating its belief that the term ``communication 
protocols'' does not cover ``blockchain-based systems''); Delphi 
Digital Letter at 6 (stating that, unless ``decentralized-in-
actuality software systems--including `automatic market-making' 
smart contract systems'' are carved out of the term ``communication 
protocols,'' the Proposed Rules would impose ``impossible compliance 
obligations on persons who may merely write open-source 
`communications protocol' code or publish information about the 
contents of communications systems which they do not control''); 
Blockchain Association Letter II at 3 (stating that application of 
the Proposed Rules to ``decentralized exchange protocols through 
which digital assets may be traded, [and] operate[d] autonomously 
and automatically through smart contracts and the participation of 
their users'' would exceed the Commission's statutory authority 
under the Exchange Act); Letter from Spence Purnell, Director of 
Technology Policy, Reason Foundation, dated Feb. 23, 2022 at 2 
(stating that the Proposed Rules should not apply to ``technologies 
such as decentralized finance and smart-contracts'' because they 
were not explicitly considered in the Proposing Release); Letter 
from Bryant Eisenbach, dated Feb. 2, 2022 (``Eisenbach Letter''). 
See also Letter from Rep. Patrick McHenry, Ranking Member, and Rep. 
Bill Huizenga, Ranking Member Subcommittee on Investor Protection, 
Entrepreneurship and Capital Markets, House Committee on Financial 
Services, dated Apr. 18, 2022 (``McHenry/Huizenga Letter'') 
(expressing concern that the Proposed Rules ``can be interpreted to 
expand the SEC's jurisdiction beyond its existing statutory 
authority to regulate market participants in the digital asset 
ecosystem, including in decentralized finance'').
---------------------------------------------------------------------------

    When adopting Exchange Act Rule 3b-16, the Commission stated that 
the exchange framework is based on the functions performed by a trading 
system, not on its use of technology.\46\ Notwithstanding how an entity 
may characterize itself or the technology it uses, a functional 
approach (taking into account the relevant facts and circumstances) 
will be applied when assessing whether the activities of a trading 
system meet the definition of an exchange. These principles continue to 
apply today under existing Rule 3b-16 and would equally apply under 
Rule 3b-16, as proposed to be amended.\47\ Accordingly, an 
organization, association, or group of persons that uses any form or 
forms of technology (e.g., DLT, including technologies used by so-
called ``DeFi'' trading systems, computers, networks, the internet, 
cloud, telephones, algorithms, a

[[Page 29453]]

physical trading floor) that constitutes, maintains, or provides a 
market place for bringing together purchasers and sellers of 
securities, including crypto asset securities, or for otherwise 
performing with respect to securities the functions commonly performed 
by a stock exchange under the current criteria of Exchange Act Rule 3b-
16(a), or Exchange Act Rule 3b-16(a), as proposed to be amended, would 
be an exchange and would be required to register as a national 
securities exchange or comply with the conditions of Regulation ATS.
---------------------------------------------------------------------------

    \46\ See Regulation ATS Adopting Release at 70902.
    \47\ See, e.g., DAO 21(a) Report (stating that ``any entity or 
person engaging in the activities of an exchange, such as bringing 
together the orders for securities of multiple buyers and sellers 
using established non-discretionary methods under which such orders 
interact with each other and buyers and sellers entering such orders 
agree upon the terms of the trade, must register as a national 
securities exchange or operate pursuant to an exemption from such 
registration,'' ``the automation of certain functions through this 
technology, `smart contracts,' or computer code, does not remove 
conduct from the purview of the U.S. federal securities laws,'' and 
that the requirements of the U.S. federal securities laws ``apply to 
those who offer and sell securities in the United States, regardless 
whether the issuing entity is a traditional company or a 
decentralized autonomous organization, regardless whether those 
securities are purchased using U.S. dollars or virtual currencies, 
and regardless whether they are distributed in certificated form or 
through distributed ledger technology'').
---------------------------------------------------------------------------

2. So-Called ``DeFi'' Systems and Exchange Act Rule 3b-16
    Several commenters state their belief that the Proposed Rules could 
cause what they describe as ``DeFi'' trading systems to meet the 
criteria of Exchange Act Rule 3b-16(a), as proposed to be amended.\48\ 
So-called ``DeFi'' trading systems can be used to allow investors to 
discover prices, find liquidity, locate counterparties, and agree upon 
terms of a trade for securities, including crypto asset securities, 
thereby performing market place activities or functions commonly 
performed by a stock exchange. Today, many systems, some of which are 
described as ``DeFi'' by commenters, bring together buyers and sellers 
of securities, including crypto asset securities, and could meet the 
existing criteria of Exchange Act Rule 3b-16(a). The Commission 
understands that so-called ``DeFi'' trading systems often rely on 
electronic messages that are exchanged between buyers and sellers so 
that they can agree upon the terms of a trade without negotiations.\49\ 
If these electronic messages constitute a firm willingness to buy or 
sell a security, including a crypto asset security, the messages would 
meet the definition of orders under existing Rule 3b-16(c).\50\ And if 
established, non-discretionary method(s) under which orders of multiple 
buyers and sellers interact with each other are provided, such as 
through the provision of certain smart contract functionality, the 
activities would be covered under existing Rule 3b-16(a). Accordingly, 
depending on the facts and circumstances, activities performed today 
using so-called ``DeFi'' trading systems could meet the criteria of 
existing Rule 3b-16 and thus constitute exchange activity. The proposed 
amendments to Rule 3b-16(a) would not, in any way, change whether such 
activities constitute exchange activity under section 3(a)(1) and Rule 
3b-16(a).
---------------------------------------------------------------------------

    \48\ See DeFi Education Fund Letter at 15; Circle Letter at 3; 
ADAM Letter I at 1-2; STANY Letter at 2; Vollmer Letter at 2; Crypto 
Council Letter at 2; LeXpunK Letter at 7-8.
    \49\ For example, AMM is a mechanism designed to create 
liquidity for others seeking to effectuate trades. See President's 
Working Group on Financial Markets, Federal Deposit Insurance 
Corporation, and Office of the Comptroller of the Currency, Report 
on Stablecoins (Nov. 2021), available at https://home.treasury.gov/system/files/136/StableCoinReport_Nov1_508.pdf. Liquidity pools of 
so-called ``DeFi'' trading systems rely on AMM protocols which 
typically use preset mathematical equations (e.g., x*y=k, where x 
and y represent the values of tokens in a liquidity pair and k is a 
constant) to ensure the ratio of assets in the liquidity pools 
remains balanced and determine prices based on trading volumes. See 
U.S. Department of the Treasury, Crypto-Assets: Implications for 
Consumers, Investors, and Businesses (Sept. 2022) (``Crypto-Assets 
Treasury Report''), available at https://home.treasury.gov/system/files/136/CryptoAsset_EO5.pdf. Some commenters argue that systems 
that use AMMs do not use trading interest as described in the 
Proposed Rules. See LeXpunK Letter at 12-13; Delphi Digital Letter 
at 9-10. One commenter states that AMM users do not interact with 
each other but with a pool of liquidity resting in a smart contract. 
See LeXpunK Letter at 12-13. This commenter states that forms of 
non-firm trading interest--conditional orders and indications of 
interest--discussed in the Proposing Release, ``do not align with 
AMMs provision of automated liquidity through the smart contract-
based deterministic mechanisms,'' where no party imposes such 
conditions or communicates such interest. See id. One commenter 
states that there are no ``orders'' on an AMM because, in contrast 
to a ``centralized'' platform which permits makers and takers to 
agree upon a price, an AMM sets the price. See Delphi Digital Letter 
at 9-10.
    \50\ See 17 CFR 240.3b-16(c).
---------------------------------------------------------------------------

    As discussed above, the Commission preliminarily believes that New 
Rule 3b-16(a) Systems, including some so-called ``DeFi'' systems, trade 
some amount of crypto asset securities, and would, under the proposed 
amendments to Exchange Act Rule 3b-16(a), be required to register as a 
national securities exchange or comply with the conditions of 
Regulation ATS.
3. Custodial Services Is Generally Not Relevant to Exchange Analysis
    Some commenters state that because so-called ``DeFi'' trading 
systems do not custody assets, they should not be subject to exchange 
regulation.\51\ One commenter states that trading conducted using 
``DeFi'' trading systems does not involve users depositing assets with 
a central authority.\52\ Another commenter states that ``custody'' with 
reference to ``DeFi'' means self-custody, which the commenter states 
does not fit ``the Commission's model, under which all exchanges are 
centralized.'' \53\ Neither existing Exchange Act Rule 3b-16 nor Rule 
3b-16, as proposed to be amended, requires an organization, 
association, or group of persons to provide custodial services to be 
considered an exchange under section 3(a)(1) of the Exchange Act and 
Rule 3b-16 thereunder.\54\ Thus, custodial services generally is not a 
relevant factor to the exchange analysis.
---------------------------------------------------------------------------

    \51\ See a16z Letter at 8-9; GDCA Letter II at 11; DeFi 
Education Fund Letter at 6. See also LeXpunK Letter at 4 n.18 
(stating that no `` `custody' or `transfer' actually occurs'' in the 
context of a ``smart contract-based platform'').
    \52\ See a16z Letter at 8-9. The commenter cites a paper stating 
``one of the main advantages of decentralized exchanges over 
centralized exchanges is the ability for users to keep control of 
their private keys.'' See id. at 8 n.41 (citing Igor Makarov & 
Antoinette Schoar, Cryptocurrencies and Decentralized Finance (DeFi) 
23 (Brookings Paper on Econ. Activity, Conference Draft, 2022)).
    \53\ See GDCA Letter II at 11. See also DeFi Education Fund 
Letter at 6 (stating ``DeFi protocols'' present ``no financial risk 
for users from broker activity or custody''). One commenter also 
states that the Commission has provided no public guidance regarding 
how a digital asset communication protocol system could arrange for 
custody and settlement to the Commission's satisfaction, in order to 
operate as an exchange. See GDCA Letter II at 10. Further, some 
commenters question how exchange regulation will apply to trading 
activities that use ``DeFi'' and do not involve an intermediary for 
trading or to custody securities. See supra note 52 and infra note 
56.
    \54\ The Customer Protection Rule requires a broker-dealer to 
promptly obtain and thereafter maintain physical possession or 
control of all fully-paid and excess margin securities it carries 
for the account of customers. See 17 CFR 240.15c3-3(b). In 2020, the 
Commission issued a statement describing its position that, for a 
period of five years, special purpose broker-dealers operating under 
the circumstances set forth in the statement will not be subject to 
a Commission enforcement action on the basis that the broker-dealer 
deems itself to have obtained and maintained physical possession or 
control of customer fully-paid and excess margin crypto asset 
securities for purposes of 17 CFR 240.15c3-3(b)(1) (``Rule 15c3-
3(b)(1)'') under the Exchange Act. See Commission Statement on 
Custody of Digital Asset Securities by Special Purpose Broker-
Dealers. To date, no person has been approved to act as a special 
purpose broker-dealer custodying crypto asset securities.
---------------------------------------------------------------------------

4. Group of Persons as the Exchange
    Some commenters ask that the Commission explain which actor or 
group of actors would be responsible for compliance and how so-called 
``DeFi'' trading systems should comply with exchange regulatory 
requirements.\55\ Some commenters express concerns that the proposed 
amendments to Exchange Act Rule 3b-16(a) would inappropriately apply to 
systems that purport not to involve intermediaries.\56\ One commenter 
states that providers of rule sets on how messages should be formed, 
stored, and relayed on a network are not like ``intermediaries of the 
traditional financial system'' because ``all they are doing is

[[Page 29454]]

publishing particular arrangements of 0s and 1s.'' \57\ In addition, 
some commenters state that ``DeFi'' trading systems may be unable to 
comply with exchange regulatory requirements because they lack a 
central operator.\58\ Some commenters interpret Exchange Act Rule 3b-
16(a), as proposed to be amended, to mean that each entity that 
performs any exchange function would need to register as a national 
securities exchange or comply with the conditions of Regulation 
ATS.\59\ For example, some commenters state that, under the proposed 
amendments to Exchange Act Rule 3b-16(a), exchange regulation could 
extend to persons including open source developers who contribute code 
to the software repositories where software for so-called ``DeFi'' 
trading systems is first published, persons who republish and share 
this information, and persons who connect to the peer-to-peer networks 
on which ``DeFi'' activities takes place.\60\ One commenter states that 
the group of persons involved in a ``DeFi'' trading system--including 
developers, AMMs, and miners--could all comprise essential components 
of the market infrastructure.\61\ This commenter further states that 
the fact that these roles might be ``decentralized'' does not change 
that they would be considered a group of persons who constitutes, 
maintains, or provides facilities for bringing together purchasers and 
sellers of securities.\62\
---------------------------------------------------------------------------

    \55\ See Letter from Paul Grewal, Chief Legal Officer, Coinbase 
Global, Inc., dated Apr. 18, 2022 (``Coinbase Letter'') at 7; a16z 
Letter at 3; Blockchain Association Letter II at 8.
    \56\ See a16z Letter at 10; ConsenSys Letter at 8; DeFi 
Education Fund Letter at 3, 11; Blockchain Association Letter II at 
3, 5; CoinList Letter at 2; Eisenbach Letter at 2. For example, one 
commenter states that what it calls ``decentralized'' systems allow 
anyone to participate rather than rely on gatekeepers. See ConsenSys 
Letter at 8.
    \57\ See Letter from Coin Center, dated Apr. 14, 2022 (``Coin 
Center Letter'') at 13. Another commenter states that developers of 
``DeFi protocols'' would not qualify as a ``group of persons'' 
because they ``merely make tools available for parties to 
communicate.'' See DeFi Education Fund Letter at 15.
    \58\ See, e.g., a16z Letter at 3; Coin Center Letter at 12; 
CoinList Letter at 2; GDCA Letter II at 11; Blockchain Association/
DeFi Education Fund Letter at 5.
    \59\ See, e.g., Letter from Robert Toomey, Managing Director and 
Associate General Counsel, Securities Industry and Financial Markets 
Association, dated June 13, 2022 (``SIFMA Letter II'') at 8.
    \60\ See Coin Center Letter at 25. See also Delphi Digital 
Letter at 9 (stating that participants could ``number in the 
hundreds or thousands and be distributed all over the world'').
    \61\ See Letter from James F. Tierney, Assistant Professor of 
Law, University of Nebraska College of Law, dated June 13, 2022 
(``Tierney Letter'') at 2 (stating that these participants in 
``blockchain and other DeFi applications'' all ``might play 
analogous roles to in-house counsel, market makers, and back-office 
clearance roles in a traditional exchange setup'').
    \62\ See id.
---------------------------------------------------------------------------

    The existence of smart contracts on a blockchain does not 
materialize in the absence of human activity or a machine (or code) 
controlled or deployed by humans. The Commission understands that, 
typically, including for so-called ``DeFi'' trading systems, a single 
organization constitutes, maintains, or provides the market place or 
facilities for bringing together buyers and sellers of securities or 
otherwise performs with respect to securities the functions commonly 
performed by a stock exchange under section 3(a)(1) and Exchange Act 
Rule 3b-16 thereunder.\63\
---------------------------------------------------------------------------

    \63\ See IOSCO Decentralization Finance Report at 8 n.13 
(stating that ``claims about decentralization for many projects may 
not hold up to scrutiny of the technical reality of what can be 
changed in the system, who can be involved in the decisions, and who 
actually is involved'').
---------------------------------------------------------------------------

    While it is common today for a single organization to provide a 
market place or facilities to bring together buyers and sellers of 
securities and meet the definition of an exchange, an exchange can also 
exist where a market place or facilities are provided by a group of 
persons, rather than a single organization.\64\ Under section 3(a)(1), 
and Exchange Act Rule 3b-16(a), the term exchange ``means any 
organization, association, or group of persons, whether incorporated or 
unincorporated, which constitutes, maintains, or provides a market 
place or facilities for bringing together buyers and sellers of 
securities or perform with respect to securities the functions commonly 
performed by a stock exchange.'' \65\ Thus, a group of persons, whether 
incorporated or unincorporated, can together constitute, maintain, or 
provide a market place or facilities or perform with respect to 
securities the functions commonly performed by a stock exchange. In 
determining which persons would be included in the group of persons 
that constitutes, maintains, or provides an exchange or performs with 
respect to securities the functions commonly performed by a stock 
exchange, important factors would generally include whether the persons 
act in concert in establishing, maintaining, or providing a market 
place or facilities for bringing together buyers and sellers of 
securities or in performing with respect to securities the functions 
commonly performed by a stock exchange, or exercise control, or share 
control, over aspects of such market place or facilities or the 
performance of functions commonly performed by a stock exchange. In 
particular, when a group of persons exercises control, or shares 
control, over the organizational, financial, or operational aspects of 
a market place or facilities for bringing together buyers and sellers 
of securities, they are a group of persons that can be deemed to 
constitute, maintain, or provide the market place or facilities.\66\
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    \64\ The term ``person'' means a natural person, company, 
government, or political subdivision, agency, or instrumentality of 
a government. 15 U.S.C. 78c(a)(9).
    \65\ In a recent decision, the United States Court of Appeals 
for the District of Columbia Circuit held that the term ``group of 
persons'' ``certainly includes closely connected corporate 
affiliates'' and noted that ``[w]hether two or more persons are or 
may be acting in concert is likely the key consideration'' in 
determining whether two or more entities may constitute a ``group of 
persons'' for purposes of the statute. Intercontinental Exch., Inc. 
v. SEC, 23 F.4th 1013, 1024 (D.C. Cir. 2022). In addition, the court 
stated that it was ``not suggest[ing] the term `group of persons' is 
synonymous with corporate affiliation'' and that ``one corporation 
that is affiliated with but not controlled by another may or may 
not, depending upon the circumstances, be considered a `group of 
persons' '' for the purposes of section 3(a)(1) of the Exchange Act. 
See id.
    \66\ In the Proposing Release, the Commission explained that, 
depending on the activities of the persons involved with the market 
place or facilities, a group of persons, who may each perform a 
function of the market place that meets the criteria of Exchange Act 
Rule 3b-16, can together provide, constitute, or maintain a market 
place or facilities for bringing together buyers and sellers of 
securities and together meet the definition of exchange. See 
Proposing Release at 15506 n.109. See also Regulation ATS Adopting 
Release at 70891 (``. . . any subsidiary or affiliate of a 
registered exchange could not integrate, or otherwise link the 
alternative trading system with the exchange, including using the 
premises or property of such exchange for effecting or reporting a 
transaction, without being considered a `facility of the exchange.' 
''). In determining whether affiliated persons would be a ``group of 
persons'' for the purposes of section 3(a)(1) of the Exchange Act 
and Rule 3b-16 thereunder, an important factor is whether the 
operations and management of the affiliated persons are separate. 
For example, an affiliated entity of an exchange might not be 
considered a group of persons with that exchange if there is 
independent governance, management, and oversight between affiliated 
entities; prevention of strategic coordination or information 
sharing between the affiliated entities by way of information 
barriers and other procedures; separation of functions relating to 
technology, operations and infrastructure, sales and marketing, 
branding, and staffing; and avoidance of business links, such as 
routing, fees, billing, and membership.
---------------------------------------------------------------------------

    Whether persons act in concert or exercise control, or share 
control, requires an analysis of the activities of each person and the 
totality of facts and circumstances. In assessing whether a person 
would be acting in concert with a group of persons, one factor to 
consider, depending on other facts and circumstances, would be the 
extent to which a person acts with an agreement (formal or informal) to 
constitute, maintain, or provide a market place or facilities for 
bringing together buyers and sellers of securities or to perform with 
respect to securities a function commonly performed by a stock 
exchange. For example, if one entity agrees with another entity to 
combine aspects of each other's market places or facilities (e.g., 
order books, display functionalities, or matching engines) to bring 
together buyers and sellers of securities, both entities could be 
considered part of the group and thus an exchange.

[[Page 29455]]

    Control could occur through several means, including, among other 
things, ownership interest, corporate organizational structure and 
management, significant financial interest, or the ability to determine 
or modify participant access, securities traded, operations or trading 
policies, or non-discretionary methods of the market place or 
facilities. For example, a person that can determine or modify, either 
individually or with others, the entering, storing, matching, or 
display of trading interest (e.g., a matching engine, a smart contract) 
would be exercising control over the operations of the market place or 
facilities. In addition, a person that can determine or modify, or 
grant or limit access to, for example, either individually or with 
others, the market or other data about the securities and securities 
transactions available on the market place or facility, order types, 
order interaction procedures (e.g., counterparty selection, 
segmentation), the priority or price at which trading interest will 
execute, or protocols for negotiation, would have the ability to 
determine trading policies or methods and exercise control over the 
market place or facilities.
    The ability to exercise control over a market place or facilities 
is not limited solely to the operational control.\67\ Also, a person 
that, for example, either individually or with others, can determine or 
modify, with respect to the market place or facilities, the securities 
made available for trading or the access requirements and conditions 
for participation would be exercising control. In addition, a person 
could exercise control by determining who can, and in what amount, 
share in profits or revenues derived from the market place or 
facilities, or by having the ability to enter into legal or financial 
agreements or arrangements on behalf of or in the name of the market 
place or facilities. Depending on the facts and circumstances, 
significant holders of governance or other tokens, for example, could 
also be considered part of the group of persons and thus an exchange if 
they can control certain aspects of it.\68\
---------------------------------------------------------------------------

    \67\ See, e.g., Regulation ATS Adopting Release at 78052 
(stating that a system that standardizes the material terms of 
instruments traded on the system will be considered to use 
established, non-discretionary methods).
    \68\ This analysis would depend on facts and circumstances. 
Whether a token holder can exercise control over a market place or 
facilities and be considered part of a ``group of persons'' would 
depend, for example, on the number of total token holders, or, if a 
holder's votes are weighted proportionally to the size of their 
holdings of tokens, the size of their holdings, as well as what 
parameters the governance tokens are set to control (e.g., 
fundamental operational decisions, strategic direction of the 
company, budgetary decisions, and ability to change the underlying 
code), among other things.
---------------------------------------------------------------------------

    Generally, an entity that engages a service provider or vendor to 
operate a market place or facilities for bringing together buyers and 
sellers of securities directs, manages, and oversees the activities of 
the service provider or vendor. In this instance, the entity, not the 
service provider or vendor, controls the market place or facilities, 
and the entity is responsible for compliance with federal securities 
laws. In certain circumstances, however, a service provider or vendor 
could exercise control, or share control, over aspects of the market 
place or facilities along with the entity that procured the service 
provider or vendor. In that case, the service provider or vendor would 
be considered a person within a group of persons that constitutes, 
maintains, or provides the market place or facilities for bringing 
together buyers and sellers of securities.\69\
---------------------------------------------------------------------------

    \69\ See Proposing Release at 15548. This would not encompass 
purely administrative items, such as human resources support, or 
basic overhead items, such as phone services, electricity, and other 
utilities. In the Proposing Release, the Commission recognized that 
an ATS may engage an entity other than the broker-dealer operator to 
perform an operation or function of the ATS or a subscriber may be 
directed to use an entity to access a service of the ATS, such as 
order entry, disseminating market data, or display, for example. See 
Proposing Release at 15548. In such instances, the ATS must ensure 
that the entity performing the ATS function complies with Regulation 
ATS with respect to the ATS activities performed. See id.
---------------------------------------------------------------------------

    The group of persons that constitutes, maintains, or provides a 
market place or facilities for bringing together buyers and sellers of 
securities or performs with respect to securities the functions 
commonly performed by a stock exchange, and is thus an exchange, would 
collectively have the responsibility for compliance with federal 
securities laws. A group of persons must consider how they will comply 
with the Exchange Act registration requirements given their activities, 
which can include, but are not limited to, designating a member of the 
group,\70\ to register the group or forming an organization to register 
as an exchange or, to operate as an ATS, registering as a broker-dealer 
and becoming a member of Financial Industry Regulatory Authority 
(``FINRA'') to ensure compliance with the requirements of the Exchange 
Act, Commission rules, and FINRA rules.\71\
---------------------------------------------------------------------------

    \70\ The group of persons would be collectively responsible for 
ensuring that the designated member of the group fulfills its 
regulatory responsibilities.
    \71\ An ATS that complies with Regulation ATS and registers as a 
broker-dealer would be required to, among other things, comply with 
the anti-money laundering and countering the financing of terrorism 
(AML/CFT) obligations under the Bank Secrecy Act. 31 CFR 1023.210; 
31 CFR 1023.320. The Bank Secrecy Act is codified at 31 U.S.C. 5311-
5314; 5316-5332 and 12 U.S.C. 1829b, 1951-1959. Additionally, 
sections 5(a) and 5(c) of the Securities Act of 1933 (``Securities 
Act'') generally prohibit any person, including broker-dealers, from 
selling a security unless a registration statement is in effect or 
has been filed with the Commission as to the offer and sale of such 
security. See 15 U.S.C. 77e(a) and (c). A New Rule 3b-16(a) System 
that operates as an ATS, which is a registered broker-dealer, could 
be subject to liability under section 5 of the Securities Act for 
facilitating the sale of a security by its customer on the ATS if 
the sale of such security is not registered or an exemption from the 
registration provisions does not apply. Section 4(a)(4) of the 
Securities Act provides an exemption for ``brokers' transactions, 
executed upon customers' orders on any exchange or in the over-the-
counter market but not the solicitation of such orders.'' See 15 
U.S.C. 77d(a)(4). To rely on this exemption, a broker-dealer is 
required to conduct a ``reasonable inquiry'' into the facts 
surrounding a proposed unregistered sale of securities before 
selling the securities to form reasonable grounds for believing that 
a selling customer's part of the transaction is exempt from section 
5 of the Securities Act. The Commission has stated that broker-
dealers ``have a responsibility to be aware of the requirements 
necessary to establish an exemption from the registration 
requirements of the Securities Act and should be reasonably certain 
such an exemption is available.'' In the Matter of World Trade 
Financial Corp., Securities Exchange Act Release No. 66114, 13 (Jan. 
6, 2012) (quoting Stone Summers & Co., Securities Exchange Act 
Release No. 9839, 3 (Nov. 3, 1972)).
---------------------------------------------------------------------------

5. Group of Persons and So-Called ``DeFi'' Systems
    One commenter states users of what it characterizes as ``DeFi'' 
protocols should not be considered part of a group of persons as they 
act independently of each other.\72\ The commenter states that 
developers and users of ``DeFi'' protocols would not qualify as a 
``group of persons'' because the developers have no ongoing 
relationship with either market participants or other financial 
providers and merely make tools available for parties to communicate, 
and users are acting independently of each other.\73\ Another commenter 
describes that the ``DeFi protocols'' deploying AMM functionality rely 
on many distinct groups or participants, which may not be ``affiliated 
or extrinsically coordinated'' with one another.\74\
---------------------------------------------------------------------------

    \72\ See DeFi Education Fund Letter at 15.
    \73\ See id.
    \74\ See Delphi Digital Letter at 9 (describing that ``[t]hey do 
not co-own assets or operate a single enterprise for profit, do not 
know each other's identities, and have diverse (and often competing) 
motivations'').
---------------------------------------------------------------------------

    Trading on so-called ``DeFi'' systems can involve multiple actors. 
These actors can include, for example, the provider(s) of the DeFi 
application or user interface, developers of AMMs or other DLT code, 
decentralized autonomous organizations (``DAO''),

[[Page 29456]]

validators or miners,\75\ and issuers or holders of governance or other 
tokens. Often, a single organization constitutes, maintains, or 
provides a DLT-based market place or facilities for bringing together 
buyers and sellers of securities or performs with respect to securities 
the functions commonly performed by a stock exchange; however, a group 
of persons can likewise do so. As indicated above, one possible avenue 
for determining which persons comprise a group of persons can include 
whether such persons act in concert to establish, provide, or maintain 
a market place or facilities for securities or to perform with respect 
to securities the functions commonly performed by a stock exchange, or 
exercise control, or share control, over aspects of the market place or 
facilities or the performance of functions commonly performed by a 
stock exchange.\76\ These actors can form a group of persons if they 
act in concert to perform, or exercise control or share control over, 
different functions of a market place or facilities for bringing 
together buyers and sellers of securities that, taken together, satisfy 
the elements of existing Exchange Act Rule 3b-16(a) or Rule 3b-16(a), 
as proposed to be amended.
---------------------------------------------------------------------------

    \75\ Validators and miners verify transactions on the underlying 
blockchain and the function they perform is not only with respect to 
a particular trading system. Validators and miners use a consensus 
mechanism (e.g., proof-of-stake or proof-of-work) to verify and add 
transactions to a distributed ledger in exchange for crypto assets. 
See Crypto-Assets Treasury Report at 11-12.
    \76\ See supra note 66.
---------------------------------------------------------------------------

    As discussed above, in assessing whether a person would be acting 
in concert with a group of persons, one factor to consider, depending 
on other facts and circumstances, would be the extent to which a person 
acts with an agreement (formal or informal) to perform a function of a 
market place or facilities for bringing together buyers and sellers of 
securities.\77\ A software developer who, acting independently and 
separate from an organization, publishes or republishes code without 
any agreement (formal or informal) with any person for that code to be 
used for a function of a market place or facilities for bringing 
together buyers and sellers of securities may be less likely to be 
acting in concert to provide a market place or facilities for bringing 
together buyers and sellers.\78\ This could be the case even if the 
software developer's code is subsequently adopted and implemented into 
a market place or facilities for securities by an unrelated person. 
Whether the activities of actors amount to a group of persons requires 
an analysis of the totality of facts and circumstances and the 
activities of each actor. If the activities of any combination of 
actors constitute, maintain, or provide, together, a market place or 
facilities for bringing together buyers and sellers for securities or 
perform with respect to securities a function commonly performed by a 
stock exchange, they could today be considered a group of persons and 
thus an exchange under section 3(a)(1) of the Exchange Act and Rule 3b-
16 thereunder and therefore be required to register as an exchange 
under section 5 of the Exchange Act.\79\
---------------------------------------------------------------------------

    \77\ See supra section II.B.4.
    \78\ See, e.g., LeXpunK Letter at 15 (requesting that the 
Commission clarify that persons who ``write and publish smart 
contract code as a hobby or business, whether to an open-source 
repository otherwise, and may not otherwise be subject to the 
jurisdiction of the U.S.'' are not intended to be captured by the 
Proposed Rules). If a software developer receives compensation for 
publishing, independently from an organization, code for a trading 
facility to match orders or a protocol for buyers and sellers to 
negotiate a trade, the software developer could be acting in concert 
with a group of persons to provide a market place or facilities for 
bringing together buyers and sellers.
    \79\ See, e.g., Regulation ATS Adopting Release at 70852 (``[I]f 
an organization arranges for separate entities to provide different 
pieces of a trading system, which together meet the definition 
contained in paragraph (a) of Rule 3b-16, the organization 
responsible for arranging the collective efforts will be deemed to 
have established a trading facility.''). See also Proposing Release 
at 15506 (stating the proposed change to use the phrase ``makes 
available'' is intended to make clear that, in the event that a 
party other than the organization, association, or group of persons 
performs a function of the exchange, the function performed by that 
party would still be captured for purposes of determining the scope 
of the exchange under Exchange Act Rule 3b-16). The Proposing 
Release also stated that, ``[d]epending on the activities of the 
persons involved with the market place, a group of persons, who may 
each perform a part of the 3b-16 system, can together provide, 
constitute, or maintain a market place or facilities for bringing 
together purchasers and sellers of securities and together meet the 
definition of exchange. In such a case, the group of persons would 
have the regulatory responsibility for the exchange.'' See id. at 
15506 n.109. See also infra notes 101-103 and accompanying text.
---------------------------------------------------------------------------

    One commenter states that attributing the function of constituting, 
maintaining, or providing an exchange to persons who initially created 
or deployed the system's code may not be practicable or advance the 
Commission's policy objectives because according to the commenter, the 
system, once deployed, typically cannot be significantly altered or 
controlled by any such persons.\80\ A smart contract deployed to, and 
run on, a blockchain is typically accompanied by other functionality to 
bring together buyers and sellers of securities (e.g., a user interface 
or website), and these functionalities can be provided and maintained 
by more than one party. If, for example, an organization deploys a 
smart contract that the organization cannot significantly alter or 
control but constitutes a market place for securities under existing 
Exchange Act Rule 3b-16 or Rule 3b-16, as proposed to be amended, then 
that organization would be an exchange and would be responsible for 
compliance with federal securities laws for that market place.\81\ 
Given that such a market place could be publicly available to bring 
together buyers and sellers of securities, requiring the organization 
to be responsible in this case would advance the Commission's policy 
objectives by ensuring the exchange complies with federal securities 
laws and regulations, including, among other things, the oversight, 
investor protection, and fair and orderly market principles applicable 
to registered exchanges and ATSs.
---------------------------------------------------------------------------

    \80\ See Coinbase Letter at 6. Likewise, some commenters state 
that software developers cannot modify or control the code they have 
developed after it is launched. See Delphi Digital Letter at 8-9; 
Blockchain Association/DeFi Education Fund Letter at 5; DeFi 
Education Fund Letter at 11; Stinson Letter; Letter from Roman 
Scher, dated Apr. 18, 2022.
    \81\ See also supra 78 and accompanying text (discussing ``group 
of persons'' involving a software developer acting independently and 
separate from an organization).
---------------------------------------------------------------------------

6. Feasibility of Compliance With Exchange Regulatory Requirements
    Some commenters state that so-called ``DeFi'' trading systems may 
have difficulty complying with certain exchange regulatory 
requirements.\82\ For example, one commenter states it is unclear that 
any party would have the necessary information to comply with 
Regulation ATS.\83\ In addition, some commenters question how DeFi 
trading systems would comply with broker-dealer requirements.\84\
---------------------------------------------------------------------------

    \82\ See, e.g., a16z Letter at 3; CoinList Letter at 2; GDCA 
Letter II at 8, 10.
    \83\ See a16z Letter at 15 (stating that there is no central 
operator of a DeFi exchange that could complete Form ATS or comply 
with periodic reporting requirements and that those who make 
available AMMs cannot identify, track the orders of, or report to 
the Commission information about users).
    \84\ See, e.g., GDCA Letter II at 8; Blockchain Association 
Letter II at 8; Letter from Lilya Tessler, Founder and Co-Chair, 
Digital Asset Regulatory & Legal Alliance, Kristin Boggiano, Founder 
and Co-Chair, Digital Asset Regulatory & Legal Alliance, Lee 
Schneider, Co-Founder, Global Blockchain Convergence, Cathy Yoon, 
Co-Founder, Global Blockchain Convergence, Renata Szkoda, 
Chairwoman, Global Digital Asset & Cryptocurrency Association, dated 
Apr. 14, 2022 (``DARLA, GBC, and Global DCA Letter'') at 9.
---------------------------------------------------------------------------

    The investor protection, fair and orderly markets, transparency, 
and oversight benefits of the federal securities laws are just as 
relevant to a system that uses DLT and meets the existing criteria of 
Exchange Act Rule

[[Page 29457]]

3b-16 and Rule 3b-16, as proposed to be amended, as to any other system 
that meets the criteria under the exchange definition. From the 
Commission's experience, systems that currently are registered as 
national securities exchanges or comply with the conditions of 
Regulation ATS differ with respect to structure, participants, and 
established, non-discretionary methods and apply many assorted 
technologies to bring together buyers and sellers of various types of 
securities. The federal securities laws apply equally to systems that 
trade securities, use DLT, and meet the criteria of Rule 3b-16 as to 
any other exchange. The federal securities laws are flexible and the 
use of DLT, or any other technology, does not make compliance 
incompatible with the federal securities laws.\85\
---------------------------------------------------------------------------

    \85\ See DAO 21(a) Report (stating that ``the automation of 
certain functions through [distributed ledger or blockchain] 
technology `smart contracts,' or computer code, does not remove 
conduct from the purview of the U.S. federal securities laws'' and 
that the requirements of the U.S. federal securities laws ``apply to 
those who offer and sell securities in the United States, regardless 
whether the issuing entity is a traditional company or a 
decentralized autonomous organization, regardless whether those 
securities are purchased using U.S. dollars or virtual currencies 
and regardless whether they are distributed in certificated form or 
through distributed ledger technology'').
---------------------------------------------------------------------------

    One commenter states that ``many Communication Protocol Systems are 
neither `brokers' nor `dealers' as defined by the Exchange Act because 
they do not effect securities transactions,'' which the commenter 
equates to ``order execution,'' and ``do not engage in the business of 
buying and selling securities.'' \86\ The commenter states accordingly 
that the option to qualify as an ATS is not available for Communication 
Protocol Systems under current law, as only a registered broker-dealer 
may qualify as an ATS.\87\
---------------------------------------------------------------------------

    \86\ See GDCA Letter II at 11-13.
    \87\ See id.
---------------------------------------------------------------------------

    Regulation ATS establishes a regulatory framework for ATSs. An ATS 
meets the definition of ``exchange'' under existing Exchange Act Rule 
3b-16(a) and Exchange Act Rule 3b-16(a), as proposed to be amended, but 
is not required to register as a national securities exchange if the 
ATS complies with the conditions of Regulation ATS, which include 
registering as a broker-dealer. Section 3(a)(4)(A) of the Exchange Act 
defines ``broker'' as ``any person engaged in the business of effecting 
transactions in securities for the accounts of others.'' \88\ The 
question of whether a person is a broker within the meaning of section 
3(a)(4) turns on the facts and circumstances of the matter. Under 
section 3(a)(4)(A), the terms ``engaged in the business'' and 
``effecting transactions'' are not defined by statute; however, 
effecting transactions in securities includes more than just executing 
trades or forwarding securities orders to a broker-dealer for 
execution.\89\ In particular, the Commission stated that effecting 
securities transactions can include participating in the transactions 
through routing or matching orders, or facilitating the execution of a 
securities transaction.\90\ In addition, courts have stated that a 
person may be found to be acting as a ``broker'' if the person 
participates in securities transactions ``at key points in the chain of 
distribution.'' \91\ Accordingly, the Commission believes that a New 
Rule 3b-16(a) System that seeks to operate as an ATS could register as 
a broker-dealer.
---------------------------------------------------------------------------

    \88\ 15 U.S.C. 78c(a)(4)(A). Section 3(a)(5)(A) defines 
``dealer'' as any person engaged in the business of buying and 
selling securities, with certain exceptions, for such person's own 
account through a broker or otherwise. 15 U.S.C. 78c(a)(5)(A).
    \89\ See Securities Exchange Act Release No. 44291 (May 11, 
2001), 66 FR 27760, 27772-73 (May 18, 2001) (stating that effecting 
securities transactions can include participating in the 
transactions through (1) identifying potential purchasers of 
securities; (2) screening potential participants in a transaction 
for creditworthiness; (3) soliciting securities transactions; (4) 
routing or matching orders, or facilitating the execution of a 
securities transaction; (5) handling customer funds and securities; 
and (6) preparing and sending transaction confirmations (other than 
on behalf of a broker-dealer that executes the trades). Further, the 
Commission stated in the Regulation ATS Adopting Release that a 
trading system that falls within the Commission's interpretation of 
``exchange'' in Rule 3b-16 will still be considered an ``exchange'' 
even if it matches two trades and routes them to another system or 
exchange for execution and that whether or not the actual execution 
of the order takes place on the system is not a determining factor 
of whether the system falls under Exchange Act Rule 3b-16. See 
Regulation ATS Adopting Release at 70852.
    \90\ See Securities Exchange Act Release No. 44291 (May 11, 
2001), 66 FR 27760, 27772-73 (May 18, 2001).
    \91\ See Mass. Fin. Serv., Inc. v. Sec. Inv. Prot. Corp., 411 F. 
Supp. 411, 415 (D. Mass. 1976), aff'd 545 F.2d 754 (1st Cir. 1976). 
See also SEC v. Nat'l Exec. Planners, Ltd., 503 F. Supp. 1066, 1073 
(M.D.N.C. 1980). Courts have also stated that in determining whether 
a person has acted as a broker, several factors are considered, 
including ``whether the person: (1) actively solicited investors; 
(2) advised investors as to the merits of an investment; (3) acted 
with a `certain regularity of participation in securities 
transactions;' and (4) received commissions or transaction-based 
remuneration.'' See, e.g., SEC v. U.S. Pension Trust Corp., 2010 WL 
3894082, *20-21 (S.D. Fla. 2010).
---------------------------------------------------------------------------

    Given that the Proposing Release applies to New Rule 3b-16(a) 
Systems that use DLT, the Commission seeks responses to the following 
questions:
    4. Which, if any, activities performed on so-called ``DeFi'' 
trading systems meet the criteria of Rule 3b-16(a), as proposed to be 
amended? For example, does the use of AMMs alone bring together 
multiple buyers and sellers of securities through the use of non-firm 
trading interest? Please explain. Please identify any relevant data, 
literature, or other information that could assist the Commission in 
analyzing this issue.
    5. Please give examples of New Rule 3b-16(a) Systems for crypto 
asset securities that use DLT or are so-called ``DeFi'' systems. 
Approximately how many such systems exist? Please identify the types of 
non-firm trading interest used and how participants use non-firm 
trading interest on such systems. Please explain what these systems 
trade (crypto asset securities or crypto assets) and the type of 
participants (e.g., retail or institutional). How do participants on a 
New Rule 3b-16(a) System for crypto asset securities that use ``DeFi'' 
systems, as characterized by commenters, negotiate trades for crypto 
asset securities? Please identify any relevant data, literature, or 
other information that could assist the Commission in analyzing these 
issues.
    6. Would an organization, association, or group of persons that is 
a New Rule 3b-16(a) System and uses DLT to trade crypto asset 
securities likely elect to register as a national securities exchange 
or comply with the conditions of Regulation ATS? Please explain.
    7. What are common characteristics of New Rule 3b-16(a) Systems for 
crypto asset securities that use DLT? Further, what are common 
characteristics of New Rule 3b-16(a) Systems for crypto asset 
securities described as ``DeFi'' trading systems? Are there any 
characteristics that heighten the need for investor protection and 
market integrity under the exchange regulatory framework?
    8. What are the various governance structures (e.g., the role of 
governance token issuers or holders or of DAOs) of trading systems that 
use DLT and how can such structures administer regulatory programs or 
respond to regulatory oversight regarding activities on the system? 
What activities do governance token issuers or holders or DAOs 
undertake regarding the governance and operation of trading systems 
that use DLT? Is there any concentration in voting and if so, how does 
that arise? Are voting rights of governance tokens or DAOs capable of 
being assigned or delegated and, if so, how is that done? How are 
changes to trading systems that use DLT effected and how are changes 
proposed to holders of voting rights under governance tokens or DAOs? 
Under what circumstances should governance or other token issuers or 
holders or DAOs be responsible for an exchange's regulatory compliance?
    9. As noted in the above requests for comment in this section, the

[[Page 29458]]

Commission seeks additional data and other information about the use of 
DLT as it relates to New Rule 3b-16(a) Systems. Please provide any such 
data, literature, or other information about the topics noted above or 
any other issue that would be relevant to the Commission's analysis of 
the Proposed Rules.

III. Proposed Amendments to Exchange Act Rule 3b-16 Generally

A. Performs Functions Commonly Performed by a Stock Exchange

    Some commenters state that the Proposing Release did not 
demonstrate that systems that offer the use of non-firm trading 
interest and provide non-discretionary protocols ``perform[] with 
respect to securities the functions commonly performed by a stock 
exchange as that term is generally understood,'' and assert that such a 
finding is required under the statutory definition of ``exchange'' 
under section 3(a)(1) of the Exchange Act.\92\ In addition, some 
commenters state that systems that offer the use of non-firm trading 
interest and provide non-discretionary protocols to bring together 
buyers and sellers of securities do not perform functions commonly 
performed by a stock exchange, as that term is generally 
understood.\93\
---------------------------------------------------------------------------

    \92\ See, e.g., ConsenSys Letter at 14-15; DeFi Education Letter 
at 13; Coinbase Letter at 3 n.9. One of the commenters also states 
that in the Regulation ATS Adopting Release, the Commission assumed 
that to meet the statutory definition, the system must be 
``generally understood'' to be performing stock exchange functions 
and ``anchored'' that rulemaking explicitly within the statutory 
definition. See Coinbase Letter at 3 n.10. In addition, a commenter 
opines that ``[m]erely indicating a possible interest in buying or 
selling a security without mentioning the quantity or pricing terms 
that would otherwise characterize an order would allow the 
Commission to deem a platform an exchange despite it not `performing 
with respect to securities the functions commonly performed by a 
stock exchange.''' Blockchain Association Letter II at 4.
    \93\ See, e.g., Coinbase Letter at 3; ConsenSys Letter at 13-14; 
DARLA, GBC, and Global DCA Letter at 3-6; Letter from Gregory 
Babyak, Global Head of Regulatory Affairs and Gary Stone, Regulatory 
Analyst and Market Structure Strategist, Bloomberg L.P., dated Apr. 
18, 2022 (``Bloomberg Letter I'') at 22.
---------------------------------------------------------------------------

    The statutory definition of ``exchange'' is written in the 
disjunctive: ``a market place or facilities for bringing together 
purchasers and sellers of securities or for otherwise performing with 
respect to securities the functions commonly performed by a stock 
exchange as that term is generally understood'' (emphasis added).\94\ 
Thus, if an organization, association, or group of persons constitutes, 
maintains, or provides a market place or facilities for bringing 
together purchasers and sellers of securities, it would be an 
``exchange''; it need not be demonstrated that the organization, 
association, or group of persons also performs functions commonly 
performed by a stock exchange as that term is generally understood. As 
discussed in the Proposing Release, systems today that offer the use of 
non-firm trading interest and provide non-discretionary protocols can 
constitute, maintain, or provide a market place or facilities for 
bringing together buyers and sellers of securities and meet the 
criteria of Exchange Act 3b-16 as proposed to be amended.\95\
---------------------------------------------------------------------------

    \94\ See 15 U.S.C. 78c(a)(1); Regulation ATS Adopting Release at 
70900 n.544 (stating ``the statutory definition of `exchange' is 
written in the disjunctive''). Section 3(a)(1) of the Exchange Act 
states that an ``exchange'' includes any organization, association, 
or group of persons that constitutes, maintains, or provides a 
market place or facilities for bringing together purchasers and 
sellers of securities or for otherwise performing with respect to 
securities the functions commonly performed by a stock exchange as 
that term is generally understood. Functions commonly performed by a 
stock exchange as that term is generally understood include, among 
other things, SRO functions and the listing of securities, by, for 
example, establishing or enforcing qualitative or quantitative 
listing standards. See Regulation ATS Adopting Release at 70880 
(stating that ``[r]egistered exchanges are able to establish listing 
standards, which may promote investor confidence in the quality of 
the securities traded on the exchange'').
    \95\ See Proposing Release at section II.C.
---------------------------------------------------------------------------

B. Makes Available Non-Discretionary Methods

    In the Proposing Release, the Commission proposed to amend Exchange 
Act Rule 3b-16(a) to provide that an organization, association, or 
group of persons would be considered to constitute, maintain, or 
provide an exchange if it: brings together buyers and sellers of 
securities using trading interest; and makes available established, 
non-discretionary methods (whether by providing a trading facility or 
communication protocols, or by setting rules) under which buyers and 
sellers can interact and agree to the terms of a trade. The Commission 
proposed, among other changes, to replace the term ``uses'' with the 
term ``makes available'' in 17 CFR 240.3b-16(a)(2) (``Rule 3b-
16(a)(2)''),\96\ and to add ``communication protocols'' as an example 
of an established, non-discretionary method that an organization, 
association, or group of persons can provide to bring together buyers 
and sellers of securities.\97\ The Commission received comment on the 
application of these proposed changes to all securities, including 
comments requesting the Commission to provide further consideration and 
opportunity for comments before adopting the proposed changes.\98\ The 
Commission is now soliciting further comment on certain Proposed Rules.
---------------------------------------------------------------------------

    \96\ See id. at 15506.
    \97\ See id. at 15506-07.
    \98\ See Bloomberg Letter I at 13-15; SIFMA Letter II at 7.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission discussed two reasons it 
proposed to replace ``uses established, non-discretionary methods'' 
with the phrase ``makes available established, non-discretionary 
methods.'' First, the Commission stated that the proposed change to use 
the term ``makes available'' rather than ``uses'' is designed to 
capture established, non-discretionary methods that an organization, 
association, or group of persons may provide, whether directly or 
indirectly, for buyers and sellers to interact and agree upon terms of 
a trade.\99\ Unlike systems that ``use'' established non-discretionary 
methods to match buyers and sellers, communication protocols systems 
offer a different method for bringing together buyers and sellers by 
providing protocols that allow participants to interact, negotiate, and 
come to an agreement.\100\
---------------------------------------------------------------------------

    \99\ See Proposing Release at 15506.
    \100\ See id.
---------------------------------------------------------------------------

    Second, the term ``makes available'' was intended to make clear 
that, in the event that a party other than the organization, 
association, or group of persons performs a function of the exchange, 
the function performed by that party would still be captured for 
purposes of determining the scope of the exchange under Exchange Act 
Rule 3b-16.\101\ The Commission has previously stated that it will 
attribute the activities of a trading facility to a system if that 
facility is offered by the system directly or indirectly (such as where 
a system arranges for a third party or parties to offer the trading 
facility).\102\ The Commission also recognized how a system may consist 
of various functionalities, mechanisms, or protocols that operate 
collectively to bring together the orders for securities of multiple 
buyers and sellers using non-discretionary methods under the criteria 
of Rule 3b-16(a), and how, in some circumstances, these various 
functionalities, mechanisms, or protocols may be offered or performed 
by another business unit of the broker-dealer operator or by a separate 
entity.\103\ The Commission stated that these principles apply equally 
to an organization, association, or group of persons that arranged with 
another

[[Page 29459]]

party to provide, for example, a trading facility or communication 
protocols, or parts thereof, to bring together buyers and sellers and 
perform a function of a system under Rule 3b-16.\104\ Consistent with 
the principles in the Regulation ATS Adopting Release, the term ``makes 
available'' would help ensure that the investor protection and fair and 
orderly markets provisions of the exchange regulatory framework apply 
to the activities performed through all functionalities, mechanisms, or 
protocols of a market place that meet the criteria of Rule 3b-16(a), 
notwithstanding whether those activities are performed by a party other 
than the organization that provides the market place.\105\
---------------------------------------------------------------------------

    \101\ See id.
    \102\ See id. (citing Regulation ATS Adopting Release at 70852).
    \103\ See id.
    \104\ See id.
    \105\ See id. See also Regulation ATS Adopting Release at 70851-
52.
---------------------------------------------------------------------------

    Commenters state that the proposed use of the term ``makes 
available'' would extend the scope of the exchange definition to a 
broad set of entities that provide services to a system and its 
participants and potentially create uncertainty and ambiguity.\106\ One 
commenter states that the Proposing Release opens up the possibility 
that systems interacting with the ATS are themselves separate exchanges 
and questions when two or more unrelated entities might be viewed as 
collectively providing the services of an exchange.\107\ One commenter 
expresses concern that the Proposed Rules would broaden the definition 
of ``exchange'' to include entities that do not themselves take an 
active role in matching orders but instead contribute in some manner to 
the efforts of buyers and sellers to identify each other and arrange 
trades, and that anyone who contributes to the existence of trading 
protocols could be considered to make them available.\108\ Another 
commenter states that the Proposed Rules do not address ``open-
architecture platforms that integrate with or embed in a third-party 
application'' and asks whether such activity would constitute making 
available communication protocols.\109\ One commenter states that the 
proposed term ``makes available'' would expand the groups of persons 
subject to the Exchange Act to include those who expressly do not fall 
under the statutory language of section 3(a)(1)--``a party other than 
the organization, association, or group of persons'' that performs a 
function on the exchange.\110\ In addition, one commenter states the 
definition should only include entities that make available systems 
``with the intent to profit from trades to which they are not a party'' 
and exclude those that integrate software available in the public 
domain and perform the role without a profit motive.\111\
---------------------------------------------------------------------------

    \106\ See, e.g., Letter from Gregory Babyak and Gary Stone, 
Regulatory Affairs, Bloomberg L.P., dated Sept. 16, 2022 
(``Bloomberg Letter II'') at 2; Letter from Elisabeth Kirby, Head of 
U.S. Market Structure, Tradeweb Markets, Inc., dated Apr. 18, 2022 
(``Tradeweb Letter'') at 5; Letter from Ken McGuire, President, 
Aditum Alternatives & Aditum Asset Management, dated Feb. 21, 2022 
(``Aditum Letter'') at 2; Letter from Gene Hoffman, President & 
Chief Operating Officer, Chia Network, dated Apr. 16, 2022 (``Chia 
Network Letter'') at 4-7; DARLA, GBC, and Global DCA Letter at 6-7; 
ConsenSys Letter at 13, 16-17; Blockchain Association Letter II at 
8-9; ADAM Letter II at 8, 16; Eisenbach Letter at 2.
    \107\ See SIFMA Letter II at 9 n.23.
    \108\ See ConsenSys Letter at 16-17. See also DeFi Education 
Fund Letter at 9-10 (stating that ``systems providing communication 
and other financial technology adjacent to trading, such as bespoke 
direct messaging or market information services, could be captured 
under the overbroad `makes available' standard'').
    \109\ See Letter from Corinna Mitchell, General Counsel, 
Symphony Communication Services, dated Apr. 18, 2022 at 4. See also 
DeFi Education Fund Letter at 9-10 (stating the ``makes available'' 
language could subject software developers to exchange regulation 
``solely on the basis of having lines of their code subsequently 
used by unrelated parties''); Tradeweb Letter at 5 (stating that the 
proposed language might affect various forms of software tools 
widely used in the securities industry).
    \110\ See Blockchain Association Letter II at 4-5 (quoting the 
Proposing Release at 15506).
    \111\ See Aditum Letter at 2.
---------------------------------------------------------------------------

Request for Comment
    10. In the Regulation ATS Adopting Release, the Commission stated 
that it would ``attribute the activities of a trading facility to a 
system if that facility is offered by the system directly or indirectly 
(such as where a system arranges for a third party or parties to offer 
the trading facility).'' \112\ In explaining the term ``makes 
available'' in the Proposing Release, the Commission stated that it was 
``designed to capture established, non-discretionary methods that an 
organization, association or groups of person may provide, whether 
directly or indirectly.'' \113\ To ensure that an exchange function 
performed by a party is appropriately captured under Exchange Act Rule 
3b-16, should the Commission adopt alternative language to ``makes 
available''? Please explain. For example, should the Commission adopt 
``Uses established, non-discretionary methods (whether by providing, 
directly or indirectly, a trading facility. . .)''? Would the addition 
of the phrase ``directly or indirectly'' align Rule 3b-16 more closely 
with prior Commission statements in the Regulation ATS Adopting Release 
\114\ and focus the rule text on a function that a party performs in 
the provision of an established, non-discretionary method to bring 
together buyers and sellers? Would the phrase ``directly or 
indirectly'' reduce commenters' concerns about the proposed ``makes 
available'' language being overbroad? Why or why not? What, if any, 
limiting principles should be applied to determining when a person 
provides ``directly or indirectly'' a trading facility or communication 
protocols (or ``negotiation protocols'')? \115\ Please explain.
---------------------------------------------------------------------------

    \112\ See Regulation ATS Adopting Release at 70852.
    \113\ See Proposing Release at 15506.
    \114\ See id. (citing Regulation ATS Adopting Release at 70852).
    \115\ See infra Request for Comment #13.
---------------------------------------------------------------------------

    11. The Commission proposed to remove the term ``uses'' and insert 
the term ``makes available'' before ``established, non-discretionary 
methods'' because the Commission proposed to include as an established, 
non-discretionary method communication protocols under which buyers and 
sellers can interact and agree to the terms of a trade. Communication 
protocols would be in addition to a trading facility, which is an 
existing established, non-discretionary method under existing Exchange 
Act Rule 3b-16(a)(2) and is used by the provider of the exchange to 
match buyers and sellers. Instead of the terms ``uses'' and ``makes 
available,'' should the Commission adopt amendments to Exchange Act 
Rule 3b-16(a)(2) that state ``[E]stablishes non-discretionary methods 
(whether by providing, directly or indirectly, a trading facility or . 
. .)''? The addition of the term ``establishes'' would adhere to the 
concept of ``established'' in existing Exchange Act Rule 3b-16(a)(2) 
and be consistent with the Commission's explanation in the Regulation 
ATS Adopting Release that the person who establishes non-discretionary 
methods is dictating the terms of trading among buyers and sellers on 
the system.\116\ For example, an organization that establishes a non-
discretionary method would be providing a trading facility or providing 
communication protocols (or ``negotiation protocols'' \117\) or setting 
rules for buyers and sellers to interact and agree upon the terms of a 
trade.
---------------------------------------------------------------------------

    \116\ See Regulation ATS Adopting Release at 70850.
    \117\ See infra Request for Comment #13.
---------------------------------------------------------------------------

C. Non-Discretionary Method: Communication Protocols

    In the Proposed Rules, the Commission proposed to add 
``communication protocols'' to Exchange Act Rule 3b-16(a) as a non-
discretionary method that an

[[Page 29460]]

organization, association, or group of persons could provide for buyers 
and sellers to interact and agree upon the terms of a trade.\118\ In 
the Proposing Release, the Commission explained that communication 
protocols, which can be applied to various technologies and 
connectivity, are provided along with the use of non-firm trading 
interest (as opposed to firm orders) to prompt and guide buyers and 
sellers to communicate, negotiate, and agree to the terms of the 
trade.\119\ The Commission also provided examples of trading systems 
that function as market places or facilities for securities by 
providing communication protocols.\120\ The Commission provided an 
example of an entity making available a chat feature that has the 
additional requirement that certain information be included in a chat 
message (e.g., price, quantity) and also setting parameters and 
structure designed for participants to communicate about buying or 
selling securities as a system that would have established 
communication protocols.\121\ The Commission also explained what would 
not be a communication protocol system for purposes of the Proposed 
Rules.\122\
---------------------------------------------------------------------------

    \118\ See Proposing Release at 15507.
    \119\ Id.
    \120\ See id. at 15500-01. These trading systems could include, 
among others, RFQ systems, stream axes, conditional order systems, 
and bilateral negotiation systems.
    \121\ See id. at 15507.
    \122\ See, e.g., id. For example, the Commission stated that it 
did not intend for communication protocols to include systems that 
only provide the connectivity or technology that allows buyers and 
sellers to communicate (such as utilities or providers of stand-
alone electronic web chat) without also establishing non-
discretionary methods that govern how the communications are allowed 
to proceed as participants agree to the terms of a trade. See id.
---------------------------------------------------------------------------

    The Commission received comment that the term ``communication 
protocol'' is too broad and vague and that it is unclear what 
activities or entities would be classified as communication protocol 
systems.\123\ Commenters suggest that the Commission should define the 
term ``communication protocol system'' to avoid uncertainty as to who 
is included or not included under its scope.\124\ Commenters state that 
the broad concept of a communication protocol system could capture 
various types of technologies used by market places for securities, 
including, for example, front-end graphical user interfaces (``GUIs''), 
web chat providers,\125\ primary market communication systems,\126\ 
software solutions,\127\ or trading desks of a broker-dealer.\128\ 
Commenters state that the uncertainty could give the impression that 
employing the term expands the scope of exchange regulation to all 
communication methods.\129\
---------------------------------------------------------------------------

    \123\ See, e.g., Letter from Lindsey Weber Keljo, Head of Asset 
Management Group, William C. Thum, Managing Director and Assistant 
General Counsel, Securities Industry and Financial Market 
Association, dated Apr. 18, 2022 (``SIFMA AMG Letter'') at 6; Letter 
from Charles V. Callan, Broadridge Financial Solutions, Inc., dated 
Apr. 18, 2022 (``Broadridge Letter'') at 2; Letter from Douglas A. 
Cifu, Chief Executive Officer, Virtu Financial, Inc., dated Apr. 18, 
2022 (``Virtu Letter'') at 11; Letter from Jennifer W. Han, Managed 
Funds Association, dated Apr. 18, 2022 (``MFA Letter'') at 7-10; 
Letter from David R. Burton, Senior Fellow in Economic Policy, The 
Heritage Foundation, dated Apr. 18, 2022 (``Burton Letter'') at 2.
    \124\ See, e.g., Healthy Markets Letter at 6; Letter from Scott 
Pintoff, General Counsel, MarketAxess, dated Apr. 18, 2022 
(``MarketAxess Letter'') at 5; Broadridge Letter at 2; Virtu Letter 
at 11. Another commenter, in expressing concern about the scope of 
the Proposed Rules, describes that the Proposed Rules did not define 
``communication protocol system.'' See McHenry/Huizenga Letter at 2.
    \125\ See, e.g., GDCA Letter II at 9; Coin Center Letter at 19-
20.
    \126\ See Letter from Scott Eisenberg, Head of Legal, 
DirectBooks LLC, dated Apr. 18, 2022.
    \127\ See SIFMA Letter II at 9.
    \128\ See Letter from Christopher A. Iacovella, Chief Executive 
Officer, American Securities Association, dated Apr. 18, 2022 (``ASA 
Letter'') at 3.
    \129\ See, e.g., Bloomberg Letter I at 19; Chia Network Letter 
at 2 (stating that ``the Commission's proposed amendments [put] the 
entire internet and connectivity businesses in jeopardy of tripping 
over the [Exchange Act]'').
---------------------------------------------------------------------------

Request for Comment
    12. In existing Exchange Act Rule 3b-16(a)(2), non-discretionary 
methods include providing a trading facility or setting rules governing 
the interaction of orders. ``Trading facility'' and ``setting rules'' 
are not defined in the rule text but are explained in the Regulation 
ATS Adopting Release and the Commission provided examples of each.\130\ 
The Commission proposed ``communication protocols'' as another non-
discretionary method for trading interest in the Proposing Release. 
Should the Commission adopt Exchange Act Rule 3b-16(a)(2), as proposed 
to be amended, to include ``communication protocols'' as an example of 
a non-discretionary method under which buyers and sellers can interact 
and agree to the terms of a trade? Why or why not? In addition to the 
guidance provided in the Regulation ATS Adopting Release, should the 
Commission provide guidance on what ``non-discretionary methods'' means 
under Exchange Act Rule 3b-16?
---------------------------------------------------------------------------

    \130\ See Regulation ATS Adopting Release at 70851-52. The 
Regulation ATS Adopting Release stated that the Commission intended 
for `` `established, non-discretionary methods' to include any 
methods that dictate the terms of trading among the multiple buyers 
and sellers entering orders into the system.'' Id. at 70850.
---------------------------------------------------------------------------

    13. To reflect systems that provide non-discretionary methods under 
which buyers and sellers negotiate terms of a trade, should the 
Commission adopt amendments to Exchange Act Rule 3b-16(a)(2) that 
replace the proposed term ``communication protocols'' with the term 
``negotiation protocols'' and adopt the following definition under a 
new Rule 3b-16(f):
    For purposes of this section, the term ``negotiation protocols'' 
means a non-discretionary method that sets requirements or limitations 
designed for multiple buyers and sellers of securities using trading 
interest to interact and negotiate terms of a trade.
    14. As discussed above, some commenters state that the term 
``communication protocol'' is too broad and vague and that it is 
unclear what activities or entities would be classified as 
communication protocol systems.\131\ The term ``negotiation protocols'' 
could better focus the non-discretionary methods that the Commission 
intended to capture in the proposed amendments to Exchange Act 3b-
16(a)(2) than the term ``communication protocols.'' The term 
``negotiation protocols'' would be another example, in addition to 
directly or indirectly providing a trading facility or setting rules, 
of a non-discretionary method established by an exchange under which 
buyers and sellers can negotiate and agree to the terms of a trade. 
What are commenters' views of the term ``negotiation protocols''? Are 
there any terms that should be added, deleted, or modified in the 
definition of ``negotiation protocol'' to make the definition more 
precise or appropriate? Are there other non-discretionary methods under 
which buyers and sellers can interact and agree to the terms of a trade 
that the Commission should add to Rule 3b-16(a)(2)? If so, please 
explain. What other types of protocols under which buyers and sellers 
can interact and agree to the terms of a trade exist or can be 
provided?
---------------------------------------------------------------------------

    \131\ See supra note 123.
---------------------------------------------------------------------------

    15. The definition of ``negotiation protocols'' described above 
would set requirements or limitations designed to govern how the 
trading interest is used by participants to interact and negotiate a 
trade. Should a definition of ``negotiation protocols'' specify both 
requirements and limitations that would constitute a non-discretionary 
method? Why or why not?
    16. As an alternative to adopting a definition of ``negotiation 
protocols'' in the rule text, should the Commission provide an 
explanation and examples of what negotiation protocols are and are not 
in any adopting release, similar to what the Commission did in the 
Regulation ATS Adopting Release when

[[Page 29461]]

analyzing the application of Rule 3b-16 to hypothetical Systems A 
through T? \132\ In the Proposing Release, the Commission provided 
examples of trading systems that offer the use of non-firm trading 
interest and established protocols that would meet the criteria of 
Exchange Act 3b-16, as proposed to be amended (e.g., RFQ, conditional 
order systems, indication of interest systems).\133\ Should the 
Commission adopt those examples as hypotheticals that would meet the 
criteria of Rule 3b-16 similar to the hypotheticals in the Regulation 
ATS Adopting Release? Please explain. Should the examples that the 
Commission provided in the Proposing Release change in any way? Are 
there any other examples that the Commission should adopt to describe 
New Rule 3b-16(a) Systems? Please describe any such examples.
---------------------------------------------------------------------------

    \132\ See Regulation ATS Adopting Release at 70854-56.
    \133\ See Proposing Release at 15500-01.
---------------------------------------------------------------------------

    17. As discussed above, whether an organization, association, or 
group of persons meets the definition of an exchange depends on the 
activities performed and not the technology used. The Commission 
received comments requesting the Commission clarify that order 
management systems, order execution systems, and order execution 
management systems (collectively referred to as ``OEMS'' technology) do 
not meet the criteria of Rule 3b-16, as proposed to be amended.\134\ 
The Commission understands that brokers, dealers, and investment 
advisers use OEMS technology to carry out their respective Commission-
regulated activities. The proposed amendments to Rule 3b-16 were not 
designed to capture within the definition of exchange the activities of 
brokers, dealers, and investment advisers who use an OEMS to carry out 
their functions (e.g., organizing and routing trading interest). The 
use of OEMS technology, however, like other types of technology, could 
be used, in certain circumstances, to perform exchange activities 
(e.g., crossing orders of multiple buyers and sellers using established 
non-discretionary methods). The Commission requests comment on what 
activities are performed today using OEMS technology and how the use of 
OEMS technology might change in the future. The Commission requests 
comment on whether and how activities performed through the use of OEMS 
technology could meet the criteria of Rule 3b-16(a), as proposed to be 
amended. Please explain why or why not.
---------------------------------------------------------------------------

    \134\ See Bloomberg Letter I at 16; SIFMA AMG Letter at 11; 
Broadridge Letter at 3; MFA Letter at 9; Letter from Kelvin To, 
Founder and President, Data Boiler Technologies, LLC, dated Apr. 18, 
2022 at 9. Several commenters express general concerns about and set 
forth policy arguments against including OEMSs within the 
Commission's exchange regulation. See, e.g., SIFMA AMG Letter at 6 
(asserting that ``the Commission's drafting risks moving too far 
beyond trading venues and is potentially capturing a broad range of 
OEMS, ETF portal, and single user systems carefully developed by a 
diverse group of market participants to introduce efficiencies and 
costs savings into the market, but which do not allow for separate 
users to interact and do not directly connect with multiple brokers 
to confirm the non-discretionary execution of orders''); Letter from 
Sarah Bessin, Associate General Counsel, Investment Company 
Institute, dated Apr. 18, 2022 (``ICI Letter'') at 9 (arguing that 
there are no perceived regulatory benefits from applying the ATS or 
broker-dealer regulatory framework to internalized trading activity 
on OEMSs, which is independently regulated, and stating that it may 
``frustrate advisers' ability to seek best execution on behalf of 
their clients'').
---------------------------------------------------------------------------

    18. In light of comments that the concept of a communication 
protocol system could capture various types of technologies used by 
market participants for securities (e.g., GUIs, web chat providers, 
primary market communication systems, software solutions, or trading 
desks of a broker-dealer), please explain in detail and provide 
examples of the specific activities performed through the use of such 
technology identified by commenters.
    19. In response to the Proposing Release, the Commission received 
several comments expressing concern that the expansion of Exchange Act 
Rule 3b-16 might encompass general internet chat services, such as 
WhatsApp, Twitter, and Reddit.\135\ As stated in the Proposing Release, 
systems that provide general connectivity for persons to communicate 
without protocols containing requirements and limitations to negotiate 
trades for securities (e.g., utilities or electronic web chat 
providers) would not fall within the definition of exchange, as 
proposed to be amended.\136\ However, the determination as to whether a 
given system would meet the criteria under Rule 3b-16(a), as proposed 
to be amended, must be based on the facts and circumstances surrounding 
the operation of the system, not the market name or categorization 
(i.e., simply because a program is called a ``chat'' or ``messaging'' 
service, it does not mean the service is per se outside the scope of 
Rule 3b-16(a), as proposed to be amended). For example, if a chat or 
messaging service was provided with a display functionality for trading 
interest in securities, an execution facility for securities, or 
protocols for participants to negotiate, the mere fact that the system 
contains a chat feature or message service would not necessarily 
preclude it from meeting the criteria of Rule 3b-16 as proposed to be 
amended. What features of a chat or message service could be considered 
protocols (i.e., requirements or limitations) under Rule 3b-16, as 
proposed to be amended, that would allow buyers and sellers to interact 
and negotiate a trade for securities? Are there currently any types of 
chat services that are solely used for discussing securities but are 
not used for negotiating a securities trade? Are there any types of 
chat services that are currently designed for buyers and sellers to 
interact and negotiate a trade for securities? Please explain why or 
why not.
---------------------------------------------------------------------------

    \135\ See, e.g., Chia Network Letter at 4-7 (stating that the 
expansion to parties that ``make available'' established, non-
discretionary methods could capture large numbers of internet and 
telecommunications providers, including any company that makes any 
sort of messaging system available to internet users such as Twitter 
and Reddit, and creates regulatory uncertainty for all such 
entities); GDCA Letter II at 10 (stating that the term trading 
interest ``sweeps up dialogue that otherwise would be outside the 
rules,'' such as `` `inadvertent' or `incidental' exchange 
activity'' through protocols ``with a primary social or business use 
unrelated to trading'' that are ``used secondarily or incidentally 
for trading'').
    \136\ See Proposing Release at 15502 n.72.
---------------------------------------------------------------------------

    20. Do commenters believe that there are other technologies, such 
as social networking websites, business communication platforms, 
financial information systems, blockchain technology nodes and smart 
contracting platforms,\137\ that could be used to perform activities 
that meet the criteria of Exchange Act Rule 3b-16(a), as proposed to be 
amended? Are there any features of these systems that could be 
considered protocols (i.e., requirements or limitations) that allow 
buyers and sellers to interact and negotiate a trade for securities? 
Please explain.
---------------------------------------------------------------------------

    \137\ See infra note 278.
---------------------------------------------------------------------------

    21. Form ATS is designed to enable the Commission to determine 
whether an ATS subject to Regulation ATS is in compliance with 
Regulation ATS and other federal securities laws.\138\ Form ATS 
provides disclosures about, among other things, classes of subscribers, 
securities traded, manner of operation, and procedures governing the 
execution, reporting, clearance, and settlement of transactions. 
Proposed Item 3(c) of Form ATS (current Form ATS Exhibit B) requires an 
ATS to disclose a list of securities the ATS trades or expects to 
trade, and requires disclosure of all securities, which includes crypto 
asset securities.\139\
---------------------------------------------------------------------------

    \138\ See Form ATS Instruction A.6.
    \139\ See Proposing Release at 15653.

---------------------------------------------------------------------------

[[Page 29462]]

    22. Form ATS-N is designed to provide market participants with 
information to, among other things, help them make informed decisions 
about whether to participate on an NMS Stock ATS (and, as proposed, on 
a Government Securities ATS).\140\ Proposed Part I, Item 8 of Form ATS-
N would require an NMS Stock ATS or Government Securities ATS to 
disclose information about the NMS stocks and government securities 
that it makes available for trading, which would include any NMS stocks 
or government securities that are crypto asset securities.\141\ Should 
the Commission adopt an amendment to proposed Item 3(c) of Form ATS or 
proposed Part I, Item 8 of Form ATS-N to require ATSs and NMS Stock 
ATSs and Government Securities ATSs to specifically identify the 
securities that are crypto asset securities? Why or why not? Should the 
Commission make any other changes to Form ATS and Form ATS-N in light 
of the Proposing Release and the information provided in this Reopening 
Release?
---------------------------------------------------------------------------

    \140\ See Form ATS-N Instruction D.
    \141\ See Proposing Release at 15542.
---------------------------------------------------------------------------

    23. Form ATS-R, which is filed on a quarterly basis and deemed 
confidential when filed, is designed to enable the Commission to more 
effectively track the growth and development of ATSs, as well as to 
more effectively comply with its statutory obligations with respect to 
ATSs, and improve investor protection.\142\ Among other things, Form 
ATS-R requires ATSs to list all securities that were traded on the ATS 
at any time during the period covered by the report \143\ and to report 
total unit and dollar volume of transactions for certain categories of 
securities.\144\ Should Form ATS-R be amended to require ATSs to 
indicate whether any of the types of securities traded on the ATS are 
crypto asset securities? For example, should Form ATS-R include a 
checkbox for each type of security listed on Form ATS-R for the ATS to 
indicate whether any of the securities transacted are crypto asset 
securities? Why or why not? Should Form ATS-R be amended to require an 
ATS to report the total unit and dollar volume of transactions in 
crypto asset securities for each category of securities? Why or why 
not? Should the Commission make any other changes to Form ATS-R in 
light of the Proposing Release and the information provided in this 
Reopening Release?
---------------------------------------------------------------------------

    \142\ See Form ATS-R Instruction A.7.
    \143\ See Form ATS-R Item 3. Form ATS-R also requires a list of 
all subscribers that were participants of the ATS during each 
calendar quarter. See Form ATS-R Item 2.
    \144\ See Form ATS-R Item 4. For example, Form ATS-R requires 
NMS Stock ATSs to report the total unit and dollar volume of 
transactions in NMS stocks that are reported to the consolidated 
tape in ``Listed Equity Securities'' (Item 4A), ``Nasdaq National 
Market Securities'' (Item 4B), or ``Nasdaq SmallCap Market 
Securities'' (Item 4C). In the Proposing Release, the Commission 
proposed to delete the categories ``Nasdaq National Market 
Securities'' and ``Nasdaq SmallCap Market Securities'' and require 
ATSs to report the total volume previously reported under these 
categories under ``Listed Equity Securities.'' See Proposing Release 
at 15580.
---------------------------------------------------------------------------

    24. Information about a New Rule 3b-16(a) System's operations, 
including operations related to non-firm trading interest and protocols 
provided for buyers and sellers to interact and negotiate the terms of 
a trade, would be responsive to proposed Item 3(g) of Form ATS, which 
requires a description of the manner of operation of the ATS. To assist 
New Rule 3b-16(a) Systems in responding to Form ATS, should the 
Commission adopt an amendment to proposed Item 3 of Form ATS to add the 
following requirement as a disclosure: ``any display of trading 
interest'' and ``protocols provided for buyers and sellers to interact 
and negotiate the terms of a trade''? Please explain why or why not. 
Although this information would be responsive to current Form ATS Item 
8(a) and would be required to be included in current Form ATS Exhibit 
F, the explicit references would make clear to ATSs that such 
information is responsive to the form and must be provided.
    25. Proposed Item 3(j) of Form ATS (current Form ATS Item 8(d), 
which is required to be disclosed on Exhibit F) would require an ATS to 
provide ``a description of the procedures governing execution, 
reporting, clearance, and settlement of transactions effected through 
the [ATS].'' \145\ Should the Commission adopt an amendment to the Item 
to include a reference to the use of DLT among the procedures so that 
the Item would state that the ATS must include ``a description of the 
procedures, including through use of DLT, governing execution, 
reporting, clearance, and settlement of transactions effected through 
the alternative trading system''? Please explain why or why not. 
Although a description of the use of DLT, or any other technology, in 
these processes is currently required by the term ``procedures,'' the 
explicit reference to DLT would make clear that a description of its 
use would be required to be provided in Form ATS.
---------------------------------------------------------------------------

    \145\ See id. at 15654.
---------------------------------------------------------------------------

    26. As discussed above, several commenters ask questions about how 
so-called ``DeFi'' systems could comply with the requirements of 
Regulation ATS.\146\ Form ATS-N, which provides operational 
transparency and regulatory oversight of NMS Stock ATSs and, as 
proposed, of Government Securities ATSs, is technology neutral and asks 
questions designed to apply to ATSs that vary in structure and offer 
many different functionalities and trading processes and procedures. 
However, Form ATS-N provides examples of specific functionalities and 
procedures that would be responsive to particular questions. To assist 
subject systems in responding to Form ATS-N, should the Commission 
adopt any changes, particularly to the examples provided in Form ATS-N, 
to clarify and highlight the applicability of certain items in Form 
ATS-N to NMS Stock ATSs and Government Securities ATSs that use DLT? 
Should, for example, the Commission adopt amendments to proposed Part 
II, Item 5 to provide examples of other products and services that the 
operator of a system that uses DLT may provide for the purpose of 
effecting transactions or submitting, disseminating, or displaying 
trading interest on the ATS? \147\ Should the Commission adopt 
amendments to Part III, Item 5(a) to provide web-based systems as an 
example of means by which the NMS Stock ATS or Government Securities 
ATS permits trading interest to be entered directly into the ATS? \148\ 
Should the Commission adopt amendments to Part III, Item 15 to provide 
examples of blockchain-based means by which trading interest can be 
displayed or made known to the ATS subscribers or the public? \149\ 
Should the Commission adopt amendments to proposed Part III, Item 21 to 
provide examples of blockchain-based procedures to manage the post-
trade processing, clearance, and/or settlement on the ATS? \150\ Should 
the Commission adopt amendments to proposed Part III, Item 22 to 
provide examples of blockchain-based market data sources? \151\
---------------------------------------------------------------------------

    \146\ See, e.g., supra note 55.
    \147\ See Proposing Release at 15546-48.
    \148\ See id. at 15552-53.
    \149\ See id. at 15563-65. Such amendments could provide 
examples of blockchain-based means by which: an ATS may display 
trading interest to its subscribers or the public; a subscriber can 
display or make known trading interest through the ATS; and trading 
interest bound for the ATS is made known to any person. See id.
    \150\ See id. at 15568-69.
    \151\ See id. at 15569.
---------------------------------------------------------------------------

D. Exclusion From Exchange Act Rule 3b-16(a)

    In the Proposing Release, the Commission proposed to amend Rule 3b-
16(b) to add an exclusion from Rule 3b-16(a) for systems that allow an 
issuer

[[Page 29463]]

to sell its securities to investors.\152\ The Commission stated in the 
Proposing Release that the exclusion was merely codifying in Rule 3b-
16(b)(3) an example the Commission provided in the Regulation ATS 
Adopting Release for systems that have a single seller of its 
securities.\153\ While such systems have multiple buyers (i.e., 
investors), they have only one seller for each security (i.e., issuers) 
and, therefore, do not meet the criteria of Rule 3b-16(a) because the 
systems do not bring together multiple buyers and multiple 
sellers.\154\
---------------------------------------------------------------------------

    \152\ See proposed Rule 3b-16(b)(3).
    \153\ See Regulation ATS Adopting Release at 70849.
    \154\ Id.
---------------------------------------------------------------------------

    One commenter states that it is unclear whether the issuer 
exclusion would cover portals on which multiple issuers offer 
securities.\155\ Another commenter suggests that the exclusion for 
issuer systems should be revised to state that it applies to a system 
that ``allows one or more issuers to sell their securities to 
investors, either directly or through placement agents or 
underwriters.'' \156\ This commenter states that a system that allows 
more than one issuer to sell its own securities is a single 
counterparty system because for any particular security, there is only 
one counterparty, the issuer of the securities.\157\ This commenter 
further states that including the phrase ``or through placement agents 
or underwriters'' is needed to make clear that the issuer exclusion may 
continue to be applied if the system permits an issuer to use brokers 
or underwriters, and this approach is desirable because it permits the 
interposition of registered brokers, who provide a multitude of 
services protective of the rights of investors.\158\
---------------------------------------------------------------------------

    \155\ See SIFMA AMG Letter at 8.
    \156\ See ABA Letter at 8.
    \157\ Id. at 9.
    \158\ Id.
---------------------------------------------------------------------------

    Two commenters request that the Commission confirm that a system or 
portal that an exchange-traded fund (``ETF'') sponsor uses to 
facilitate ETF primary market operations (i.e., creation and redemption 
of ETF shares) (``ETF Portal'') is not a communication protocol system, 
as defined in the Proposing Release, and otherwise does not meet the 
definition of ``exchange,'' as proposed to be amended.\159\ The 
commenters state that ETF Portals enable registered broker-dealers that 
serve as an ETF's authorized participants (``APs'') to communicate 
creation or redemption requests for an ETF.\160\ One of the commenters 
states that ETF Portals do not create a market place for secondary 
market trading activity (i.e., trading of the actual ETF shares among 
individual investors) because they are used by ETF sponsors for the 
specific purpose of creating and redeeming their own issued 
securities.\161\ In this respect, this commenter believes that ETF 
Portals are similar to a system that allows issuers to sell their own 
securities to investors.\162\ Another commenter similarly agrees that 
ETF Portals should not be included in the definition of an ``exchange'' 
and does not believe there would be any public benefit to treating such 
portals as exchanges and requiring ATS registration.\163\
---------------------------------------------------------------------------

    \159\ See SIFMA AMG Letter at 8; ICI Letter at 13. The 
commenters state that they do not believe that the Commission 
intended to classify ETF Portals as exchanges under Rule 3b-16, as 
proposed to be amended. See id.
    \160\ See id.
    \161\ See ICI Letter at 14. This commenter also states that an 
ETF Portal's activities are limited in the following respects: ``(1) 
the scope of ETFs involved in the creation or redemption process is 
confined to those offered by the ETF sponsor; (2) only registered 
broker-dealers that have an established agreement with an ETF 
sponsor's ETF to act as an AP can submit creation or redemption 
requests to the ETF; and (3) the system or portal does not directly 
facilitate secondary market activity in the ETF (i.e., trading of 
the actual ETF shares among individual investors), nor does it 
provide access for individual investors that are not registered 
broker-dealers.'' Id. at 13.
    \162\ See id. at 14. This commenter further states that applying 
the Regulation ATS and broker-dealer regulatory frameworks to ETF 
Portals would impose unnecessary additional costs and burdens to the 
ETF creation and redemption process, lead to unintended 
consequences, and would not further the Commission's regulatory 
objectives. See id. at 4.
    \163\ See SIFMA AMG Letter at 8.
---------------------------------------------------------------------------

Request for Comment
    27. Should the Commission adopt Rule 3b-16(b)(3), as proposed to be 
amended? Why or why not? Should the Commission adopt the proposed Rule 
3b-16(b)(3) exclusion but with certain revisions? If so, please 
identify those revisions and explain. For example, should the 
Commission adopt, as suggested by one commenter, the proposed issuer 
exclusion with revisions to state that it applies to a system that 
``allows one or more issuers to sell their securities to investors, 
either directly or through placement agents or underwriters''? In 
particular, should the Commission add ``one or more issuers'' to the 
proposed issuer exclusion? What types of systems would be covered under 
the revised issuer exclusion example above? Please explain. Is the 
inclusion of ``either directly or through placement agents or 
underwriters'' in the revised issuer exclusion example above necessary 
or appropriate to clarify its application? If so, why?
    28. How do ETF Portals operate for the creation and redemption of 
securities? Who are the participants in ETF Portals and how do they 
interact? Are there any trading activities conducted as part of the 
creation and redemption process through an ETF Portal that are exchange 
activities or necessitate further clarification by the Commission as to 
whether such activities are exchange activities? Do an ETF Portal's 
activities facilitate secondary market activity in the ETF? Why or why 
not? Does trading in ETF Portals involve multiple buyers and sellers of 
securities? Why or why not? What non-discretionary methods are 
generally used by ETF Portals?
    29. Do ETF Portals fall within the criteria of existing Exchange 
Act Rule 3b-16(a) or Rule 3b-16(a), as proposed to be amended? Why or 
why not? If the activities conducted through ETF Portals fall within 
the criteria of existing Exchange Act Rule 3b-16(a) or Rule 3b-16(a), 
as proposed to be amended, should the Commission adopt an exclusion 
under Exchange Act Rule 3b-16(b)(3) for ETF Portals? If yes, please 
explain why and explain what the exclusion should apply to. How should 
an ETF Portal be defined for purposes of the exclusion? For example, 
should the Commission expressly adopt an exclusion that applies only to 
ETF Portals that fall within this definition: ``a system that allows 
one or more issuers from the same sponsoring entity to solicit creation 
or redemption requests for their own securities submitted by authorized 
participants for those securities''? Should the Commission adopt an 
exclusion that applies only to platforms that solely support primary 
market transactions in investment company securities, where the issuer 
of the security participates in each transaction either as the sole 
buyer, or as the sole seller? If so, should the exclusion be available 
only for securities issued by ETFs or also for securities issued by 
other investment companies? Should the exclusion specify that it is 
available only for transactions that take place at a price based on the 
current net asset value of the security, as required by 17 CFR 270.22c-
1 (Rule 22c-1 under the Investment Company Act of 1940)? What ETF 
Portals should not be excluded from Exchange Act Rule 3b-16(a)? Please 
explain.

[[Page 29464]]

E. Compliance Date for Implementation of Proposed Amendments to Rule 
3b-16

    Exchange Act Rule 3b-16, as proposed to be amended, would require, 
if adopted, New Rule 3b-16(a) Systems to comply with federal securities 
laws applicable to national securities exchanges and ATSs. These 
systems may trade securities that are crypto asset securities, or 
specific types of securities, including NMS stock, over-the-counter 
(``OTC'') equity securities, corporate bonds, municipal securities, 
government securities, foreign sovereign debt, asset-backed securities, 
restricted securities, or options. New Rule 3b-16(a) Systems provide 
access to numerous and diverse market participants (e.g., retail 
investors, institutional investors, broker-dealers, issuers) seeking to 
perform different trading strategies and investment objectives in 
various types of securities. To facilitate these market participants' 
trading strategies and investment objectives, providers of these 
trading systems employ assorted technology and protocols (e.g., 
internet, DLT, cloud) and apply a variety of methods to bring together 
buyers and sellers in securities (e.g., RFQ, indication of interest, 
negotiation, conditional orders, bid wanted in competition, streaming 
axes).
    Several commenters express concern that New Rule 3b-16(a) Systems 
would not be provided enough time to comply with their new regulatory 
obligations.\164\ As stated in the Proposing Release, the Commission 
expects that many New Rule 3b-16(a) Systems would elect to register as 
broker-dealers and comply with Regulation ATS; \165\ however, they can 
also elect to register as exchanges.\166\ The Commission recognizes 
that New Rule 3b-16(a) Systems are operating today and would seek to 
comply with the Proposed Rules without disrupting their current 
business and their participants. To facilitate the trading system 
operators' compliance with the Proposed Rules, the Commission is 
soliciting further public comment on any compliance dates for the 
Proposed Rules.
---------------------------------------------------------------------------

    \164\ See, e.g., MarketAxess Letter at 5; Letter from Teana 
Baker-Taylor, Chief Policy Officer, Chamber of Digital Commerce, 
dated Mar. 24, 2022 (``Chamber Letter'') at 5; Letter from Elisa 
Hirschmann, Executive Director, Chief Compliance Officer, BrokerTec 
Americas LLC, CME Group, Inc., dated Apr. 18, 2022 at 4; Bloomberg 
Letter I at 4-5; Letter from Scot J. Halvorsen, Associate General 
Counsel, Cboe Global Markets, Inc., dated Apr. 18, 2022 (``Cboe 
Letter'') at 2; Crypto Council Letter at 7.
    \165\ See Proposing Release at 15502.
    \166\ See id. at 15617-18.
---------------------------------------------------------------------------

Request for Comment
    30. Should the Commission adopt a compliance date to delay 
implementation for New Rule 3b-16(a) Systems? Why or why not? Should 
the Commission adopt the same compliance date for all New Rule 3b-16(a) 
Systems or different compliance dates depending on certain factors, 
such as the type of securities the system trades? Please explain. For 
example, should the Commission adopt separate compliance dates to 
implement the proposed amendments to Exchange Act Rule 3b-16 for 
trading systems that trade one or more of the following: NMS stock, OTC 
equity securities, corporate bonds, municipal securities, government 
securities, foreign sovereign debt, asset-backed securities, restricted 
securities, or options? Please explain.
    31. As indicated above, crypto assets generally use DLT as a method 
to record ownership and transfers, and a crypto asset that is a 
security is not a separate type or category of security for purposes of 
federal securities laws based solely on the use of DLT.\167\ Should the 
Commission adopt a separate compliance date for New Rule 3b-16(a) 
Systems that trade crypto asset securities? \168\ Please explain. If 
the Commission adopts a different compliance date for New Rule 3b-16(a) 
Systems that trade crypto asset securities, for purposes of ascribing 
such compliance date, should ``crypto asset securities'' be defined to 
mean securities that are also issued and/or transferred using 
distributed ledger or blockchain technology, including, but not limited 
to, so-called ``virtual currencies,'' ``coins,'' and ``tokens,'' to the 
extent they rely on cryptographic protocols? \169\ Please explain.
---------------------------------------------------------------------------

    \167\ See supra note 27 and accompanying text.
    \168\ Such a delayed compliance date for New Rule 3b-16(a) 
Systems would not impact the obligation of systems that meet the 
existing criteria of Rule 3b-16 to comply with existing rules.
    \169\ In the past, the Commission used this definition for 
``digital asset securities'' in the Commission Statement on Custody 
of Digital Asset Securities by Special Purpose Broker-Dealers. See 
supra note 26.
---------------------------------------------------------------------------

    32. Should the Commission adopt a uniform compliance period for all 
categories of securities that is one year? Or would a shorter or longer 
time period than one year be sufficient or necessary? If commenters 
believe the Commission should adopt different compliance dates for 
trading systems that trade a category of security, what compliance date 
should the Commission adopt for such trading systems? Please explain.
    33. Should the Commission adopt different compliance dates for New 
Rule 3b-16(a) Systems based on the types of participants that trade on 
the system? For example, should the Commission adopt a delayed 
compliance date for trading systems that have predominately retail, 
institutional, or broker-dealer participants? Please explain. What 
compliance date should the Commission adopt for these types of trading 
systems? Please explain.
    34. Should the Commission adopt different compliance dates for New 
Rule 3b-16(a) Systems based on the different means by which 
participants enter trading interest into the system? For example, 
should the Commission adopt a delayed compliance date for trading 
systems that perform intermediary services, such as entering trading 
interest into the trading system on behalf of users or offering users 
services other than trading? Should the Commission adopt a delayed 
compliance date for trading systems that allow buyers and sellers to 
enter trading interest into the system directly without an 
intermediary? Please explain. What compliance date should the 
Commission adopt for these types of trading systems? Please explain.
    35. Should the Commission adopt different compliance dates for New 
Rule 3b-16(a) Systems based on different trading protocols that bring 
together buyers and sellers to negotiate a trade? For example, should 
the Commission adopt different compliance dates for trading systems 
that provide RFQs, indications of interest, bids wanted in competition, 
or streaming axes? Should the Commission adopt a delayed compliance 
date for trading systems that use AMMs for buyers and sellers to enter 
trading interest into the system and negotiate a trade? What compliance 
date should the Commission adopt for these types of trading systems? 
Please explain.
    36. Should the Commission adopt different compliance dates for New 
Rule 3b-16(a) Systems based on the technology supporting its exchange 
activity (e.g., internet, DLT, cloud)? For example, should the 
Commission adopt a delayed compliance date for trading systems that use 
DLT to bring together buyers and sellers using trading interest and 
establish protocols that allow participants to negotiate a trade? 
Please explain. What compliance date should the Commission adopt for 
these types of trading systems? Please explain.
    37. Should the Commission adopt different compliance dates for New 
Rule 3b-16(a) Systems based on the volume that trading systems 
transact? For example, should the Commission adopt a delayed compliance 
date for a trading system that transacts a certain level of dollar 
volume or share volume, and if

[[Page 29465]]

so, what should that volume be? Should the Commission adopt different 
compliance dates for trading systems based on all of their transaction 
volume or only transaction volume in a category of security or in a 
crypto asset security? Please explain. What compliance date should the 
Commission adopt for these types of trading systems? Please explain.
    38. Should the Commission adopt different compliance dates for New 
Rule 3b-16(a) Systems based on a combination of factors described above 
or any other factors? Please explain.

IV. Paperwork Reduction Act

    In the analysis of the proposed rule amendments under the Paperwork 
Reduction Act of 1995 (``PRA'') of the Proposing Release, the 
Commission estimated 22 Communication Protocol Systems \170\ would be 
impacted by the Proposed Rules. This estimate included systems that 
offer trading of OTC equity securities and restricted securities, some 
of which trade crypto asset securities.
---------------------------------------------------------------------------

    \170\ The Proposing Release referred to systems that would newly 
meet the definition of ``exchange'' under the Proposed Rules as 
``Communication Protocol Systems.'' See Proposing Release at 15496 
n.5. See also id. at 15586 (estimating the total number of 
Communication Protocol Systems to be 22).
---------------------------------------------------------------------------

    The Commission is revising the estimated number of trading systems 
that would be impacted by the proposed amendments to Exchange Act Rule 
3b-16 to include: (1) New Rule 3b-16(a) Systems that trade crypto asset 
securities and were not included in the estimates in the Proposing 
Release, and (2) New Rule 3b-16(a) Systems for non-crypto asset 
securities that have exited, entered, or intend to enter, the market 
since the Commission issued the Proposing Release. The Commission is 
not revising its estimate of the per-respondent burdens that would be 
imposed by the proposed amendments to Rule 3b-16(a). The summary of the 
``collection of information'' requirements within the meaning of the 
PRA and the proposed use of such information described in the Proposing 
Release are unchanged.

A. Respondents

    As discussed in the Proposing Release,\171\ the Commission believes 
that New Rule 3b-16(a) Systems would likely choose to register as a 
broker-dealer and comply with the conditions of Regulation ATS rather 
than register as a national securities exchange because of the lighter 
regulatory requirements imposed on ATSs, as compared to registered 
exchanges.\172\ For purposes of this PRA analysis, New Rule 3b-16(a) 
Systems that would comply with Regulation ATS are referred to as 
``Newly Designated ATSs.'' \173\ In the Proposing Release, the 
Commission estimated the total number of Newly Designated ATSs, across 
all asset classes, to be 22.\174\ Since issuing the Proposing Release, 
the Commission has learned, based on public sources of information, of 
several trading systems that appear to offer the use of non-firm 
trading interest, provide non-discretionary protocols, trade crypto 
asset securities, and were not included within the Commission's initial 
estimate of the number of respondents. Based on publicly-available 
information, these trading systems may meet the criteria of Exchange 
Act Rule 3b-16(a) as proposed to be amended and therefore, this PRA 
analysis includes estimates of the burdens that these systems would 
incur under the Proposed Rules. Many of the entities operating such 
trading systems, however, depending on their activities and other facts 
and circumstances, may be subject to existing federal securities laws 
and registration requirements, including the requirement to register as 
an exchange under existing criteria of Rule 3b-16(a) or the requirement 
to register as a broker-dealer. In this regard, the Commission 
recognizes that it may be over-estimating the number of respondents 
that may be subject to the Proposed Rules. Specifically, the Commission 
is revising the estimated total number of Newly Designated ATSs from 
the 22 estimated systems in the Proposing Release to a total of 35-46 
estimated Newly Designated ATSs,\175\ which would include: (1) an 
additional 15-20 New Rule 3b-16(a) Systems that trade crypto asset 
securities,\176\ and (2) 20-26 Newly Designated ATSs (revised from the 
22 Newly Designated ATSs estimated in the Proposing Release),\177\ 
which has been revised to reflect New Rule 3b-16(a) Systems for non-
crypto asset securities that have exited, entered, or intend to enter, 
the market since the Commission issued the Proposing Release. For the 
purposes of this PRA analysis, the Commission is analyzing the burdens 
for an estimated 46 Newly Designated ATSs, based on

[[Page 29466]]

the high end of these ranges.\178\ Some or all of this total number 
will be subject to the following collections of information \179\ as 
estimated below:\180\
---------------------------------------------------------------------------

    \171\ See id. at section VII.
    \172\ See id. at section II.D. As discussed above, today, the 
Commission preliminarily believes that some amount of crypto asset 
securities trade on New Rule 3b-16(a) Systems. See supra note 31. 
These systems are not included as estimated respondents for the 
purposes of the PRA analysis because they are already required to 
comply with current applicable regulations; the proposed amendments 
to Rule 3b-16 would not result in any new burden on these systems. 
Rather, the PRA analysis includes the estimated number of 
respondents for which a new burden would be imposed by the proposed 
amendments to Rule 3b-16. Further, as discussed earlier in this 
section, the Commission is not revising its estimate of the per-
respondent burdens that would be imposed by the proposed amendments 
to Rule 3b-16. The increase in the estimate of total burdens across 
all respondents is due solely to the Commission revising its 
estimate of the number of respondents to include: (1) systems that 
would meet the criteria of Rule 3b-16, as proposed to be amended, 
and trade crypto asset securities; and (2) systems that would meet 
the criteria of Rule 3b-16, as proposed to be amended, and trade 
securities that are not crypto asset securities and have entered, 
intend to enter, or exited the market since the Commission issued 
the Proposing Release.
    \173\ See supra note 170. The description of respondents and 
burden estimates described in this Reopening Release for Newly 
Designated ATSs supersedes and replaces corresponding respondent and 
burden estimates for Communication Protocol Systems in the Proposing 
Release.
    \174\ See Proposing Release at section VII.C.
    \175\ As discussed in the Proposing Release, some of the 
estimates could change based on how the Newly Designated ATSs 
structure their operations if subject to Regulation ATS. See id. at 
15586 n.749. For example, the Commission is basing some of the below 
estimates on the assumption that operators of Newly Designated ATSs 
that are affiliated with existing broker-dealers would structure 
their operations so that the existing broker-dealer would operate 
the ATS to avoid the costs of new broker-dealer registration. In 
addition, the Commission estimates that 2 Newly Designated ATSs that 
trade municipal securities or corporate debt securities would meet 
the volume thresholds to satisfy the conditions for complying with 
ATS-specific systems capacity, integrity and security recordkeeping 
as well as systems outages requirements. This number is based on 
aggregate data reported by broker-dealers and could vary based on 
how these systems structure their businesses.
    \176\ The Commission received several comments stating that the 
PRA analysis in the Proposing Release underestimated or did not 
include systems that trade crypto asset securities. See, e.g., 
Bloomberg Letter II at 2-3; Coin Center Letter at 25; Coinbase 
Letter at 6; Crypto Council Letter at 4-7. One commenter states that 
the Commission did not include approximately 288 crypto 
``exchanges,'' 200 crypto AMMs, and 9 front-end platforms that offer 
liquidity aggregation and (smart) order routing functionality. See 
Bloomberg Letter II at 2-3. It is not clear from the comment letter 
whether these systems operate in the U.S., use non-firm trading 
interest, and provide non-discretionary protocols to bring together 
buyers and sellers to negotiate, and thus would be New Rule 3b-16(a) 
Systems and subject to the new burdens analyzed under the PRA. In 
addition, the Commission preliminarily believes that some amount of 
crypto asset securities trade on New Rule 3b-16(a) Systems. See 
supra note 31. These systems could be some or many of the systems 
the commenter references. However, without additional information, 
the Commission is unable to assess whether the systems referenced by 
the commenter would meet existing Rule 3b-16(a), or Rule 3b-16(a), 
as proposed to be revised. In addition, some commenters estimate 
that hundreds or thousands of persons could be captured by the 
proposed rule change. See supra note 60. See also SIFMA Letter II at 
8-9 (stating that ``[t]he broad concept of communication protocol 
systems could theoretically capture hundreds, if not thousands, of 
systems across asset classes'' and there is a disconnect with the 
Commission's estimate that 22 systems would be affected by the 
Proposed Rules). As discussed above, systems would constitute a 
single exchange and be responsible for compliance as a single 
entity. See supra section II.B.
    \177\ The original 22 Newly Designated ATSs the Commission 
estimated in the Proposing Release may include ATSs that trade 
crypto asset securities.
    \178\ In the Proposing Release, the Commission certified that 
the proposed amendments to Regulation ATS would not, if adopted, 
have a significant economic impact on a substantial number of small 
entities pursuant to section 3(a) of the Regulatory Flexibility Act 
of 1980 (5 U.S.C. 603(a)). See Proposing Release at 15645. The 
Commission did not receive any comment regarding its certification. 
Although the Commission is now revising its estimate of the number 
of respondents that would be subject to the proposed rules, the 
Commission continues to certify that the proposed amendments would 
not, if adopted, have a significant economic impact on a substantial 
number of small entities. As in the Proposing Release, the 
Commission encourages written comments regarding this certification.
    \179\ The estimates presented here relate only to those 
collections of information for which the burdens will change as a 
result of increasing the estimated total number of Newly Designated 
ATSs. For the complete estimated burden associated with the proposed 
amendments, the estimates here for Newly Designated ATSs should be 
considered together with those originally included in the Proposing 
Release for Communication Protocol Systems, see Proposing Release at 
section VII, with any burden identified by the identical combination 
of Collection of Information and rule number replaced and superseded 
by that contained here.
    \180\ The estimated respondents for the Rule 304/Form ATS-N 
collection of information is based on the assumption that systems 
that operate multiple market places that are affiliated with a new 
or existing broker-dealer will all be operated by such broker-
dealer, and that such systems will not register multiple broker-
dealers to operate multiple affiliated ATSs.

----------------------------------------------------------------------------------------------------------------
                                                        Number of
   Collection of  information           Rule           respondents                   Description
----------------------------------------------------------------------------------------------------------------
Rule 301 of Regulation ATS and   17 CFR                          37  The Commission estimates that certain Newly
 Forms ATS and ATS-R.             242.301(b)(2)                       Designated ATSs that trade securities
                                  (``Rule                             other than NMS stocks or government
                                  301(b)(2)'').                       securities or repos, including crypto
                                                                      asset securities, would be required to
                                                                      file the proposed modernized Form ATS.
                                 Rule 301(b)(5)....              10  The Commission estimates that certain Newly
                                                                      Designated ATSs would meet the volume
                                                                      thresholds in government securities, NMS
                                                                      stocks, corporate debt securities,
                                                                      municipal securities, equity securities
                                                                      that are not NMS stocks and for which
                                                                      transactions are reported to an SRO and be
                                                                      subject to the Fair Access Rule.
                                 17 CFR                          46  The Commission estimates that all Newly
                                  242.301(b)(9)                       Designated ATSs will need to comply with
                                  (``Rule                             the requirement to file quarterly reports
                                  301(b)(9)'').                       on the proposed modernized Form ATS-R.
                                 17 CFR                          46  The Commission estimates that all Newly
                                  242.301(b)(10)                      Designated ATSs will need to comply with
                                  (``Rule                             the requirement to have written safeguards
                                  301(b)(10)'').                      and written procedures to protect
                                                                      subscribers' confidential trading
                                                                      information.
Rule 302 of Regulation ATS.....  17 CFR 242.302                  46  The Commission estimates that all Newly
                                  (``Rule 302'').                     Designated ATSs will need to comply with
                                                                      the recordkeeping requirements for ATSs.
Rule 303 of Regulation ATS.....  17 CFR 242.303                  46  The Commission estimates that all Newly
                                  (``Rule 303'').                     Designated ATSs will need to comply with
                                                                      the record preservation requirements for
                                                                      ATSs.
Rule 304 of Regulation ATS.....  17 CFR 242.304                   9  The Commission estimates that certain
                                  (``Rule 304'').                     Communication Protocol Systems that trade
                                                                      NMS stocks or government securities or
                                                                      repos would be required to file Form ATS-
                                                                      N, as proposed to be revised.
Rule 15b1-1 and Form BD........  17 CFR 240.15b1-1               27  The Commission estimates that certain Newly
                                  (``Rule 15b1-1'').                  Designated ATSs are not currently
                                                                      registered as or affiliated with a broker-
                                                                      dealer and will need to register using
                                                                      Form BD. This would include all Newly
                                                                      Designated ATSs that trade crypto asset
                                                                      securities that do not currently file a
                                                                      Form ATS.
Form ID........................  17 CFR 232.101                  27  The Commission estimates that the same
                                  (``Rule 101 of                      subset of Newly Designated ATSs that are
                                  Regulation S-T'').                  not currently registered as or affiliated
                                                                      with a broker-dealer will also need to
                                                                      file Form ID to apply for EDGAR access.
----------------------------------------------------------------------------------------------------------------

B. Total PRA Burdens

    The Commission continues to assume that, under the proposed 
amendments, Newly Designated ATSs will choose to register as broker-
dealers and comply with the conditions of Regulation ATS, rather than 
register as a national securities exchange,\181\ and the estimates 
below reflect this assumption.
---------------------------------------------------------------------------

    \181\ See Proposing Release at 15618 n.1056 and accompanying 
text.
---------------------------------------------------------------------------

1. Burden of Rule 301 of Regulation ATS and Forms ATS and ATS-R
a. Rule 301(b)(2) Burden on Newly Designated ATSs
    As discussed in the Proposing Release, the Commission estimates 
that each Newly Designated ATS would incur an initial burden of 20.5 
hours \182\ and an annual burden of 5 hours \183\ for complying with 
Rule 301(b)(2). In light of the revision of the Commission's estimate 
of Newly Designated ATSs, the Commission estimates the following total 
initial and annual burdens:
---------------------------------------------------------------------------

    \182\ The Commission's currently approved baseline for the 
average initial compliance burden for each initial operation report 
(``IOR'') on Form ATS is 20 hours (Attorney at 13 hours + Compliance 
Clerk at 7 hours). See Extension Without Change of a Currently 
Approved Collection: Regulation ATS Rule 301 Amendments; ICR 
Reference No. 202101-3235-011; OMB Control No. 3235-0509 (June 9, 
2018), available at https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=202101-3235-011 (``Rule 301 PRA Supporting 
Statement''). The Commission proposed amendments to Part I of Form 
ATS, which would add an additional burden of 0.5 hours per filing 
using the modernized form (Compliance Clerk at 0.5 hours), and 
therefore the average compliance burden for each Form ATS filing 
would be 20.5 hours. See Proposing Release at section V.B and 
section VII.E (discussing proposed changes).
    \183\ The Commission's currently approved baseline for the 
average ongoing compliance burden for each amendment to a Form ATS 
IOR is 4 hours ((Attorney at 1.5 hours + Compliance Clerk at 0.5 
hours) x 2 IOR amendments a year). See Rule 301 PRA Supporting 
Statement. The Commission proposed amendments to Part I of Form ATS, 
including a requirement applicable to an ATS filing an IOR amendment 
to attach as Exhibit 3 a marked document to indicate changes to 
``yes'' or ``no'' answers and additions or deletions from any Item 
in Part I, Part II, and Part III, which would add an additional 
annual burden of 1 hour per ATS using the modernized form 
(Compliance Clerk at 0.5 hours x 2 IOR amendments a year). Therefore 
the average compliance burden for each Form ATS filing would be 5 
hours. See Proposing Release at section V.B and section VII.E 
(discussing proposed changes).

[[Page 29467]]

----------------------------------------------------------------------------------------------------------------
                                                                                                 Total burden
                                                                                                  (number of
           Burden type              Respondent type        Number of          Burden per         respondents x
                                                          respondents         respondent          burden per
                                                                                                  respondent)
----------------------------------------------------------------------------------------------------------------
Initial.........................  Newly Designated                    37  20.5 hours........  758.5 hours.
                                   ATSs.
Annual..........................  ...................  .................  5 hours...........  185 hours.
----------------------------------------------------------------------------------------------------------------

b. Rule 301(b)(5) Burden on Newly Designated ATSs

    As discussed in the Proposing Release, the Commission estimates an 
annual compliance burden of 37 hours per respondent for Rule 
301(b)(5).\184\ In light of the revision of the Commission's estimate 
of Newly Designated ATSs, the Commission estimates the following total 
annual burdens:
---------------------------------------------------------------------------

    \184\ The Commission's currently approved baseline for the 
average compliance burden per respondent is 37 hours = 10 hours for 
Fair Access standards recordkeeping (Attorney at 5 hours x 2 
responses a year) + 27 hours for Fair Access notices (Attorney at 1 
hour x 27 responses a year). See Proposing Release at section 
VII.D.1.b.

----------------------------------------------------------------------------------------------------------------
                                                                                          Total annual burden
                                             Number of          Annual burden per      (number of  respondents x
            Respondent type                 respondents             respondent             annual burden per
                                                                                              respondent)
----------------------------------------------------------------------------------------------------------------
Newly designated ATSs..................                 10  37 hours.................  370 hours.
----------------------------------------------------------------------------------------------------------------

c. Rule 301(b)(6) Burden on Newly Designated ATSs
    The Commission estimates that none of the Newly Designated ATSs 
trading crypto asset securities or that have entered or intend to enter 
the market since the Commission issued the Proposing Release would meet 
the applicable volume requirements and be subject to the requirements 
of 17 CFR 242.301(b)(6) (``Rule 301(b)(6)''), and therefore, the 
estimates in the Proposing Release remain unchanged.
d. Rule 301(b)(9) Burden on All Respondents
    As discussed in the Proposing Release, the Commission estimates an 
annual compliance burden of 19 hours per new Form ATS-R respondent 
\185\ and 3 hours per existing Form ATS-R respondent.\186\ In light of 
the revision of the Commission's estimate of Newly Designated ATSs, the 
Commission estimates the following total annual burdens:
---------------------------------------------------------------------------

    \185\ The annual burden per Newly Designated ATS would be 4.75 
hours x 4 quarterly filings annually = 19 burden hours. See 
Proposing Release at 15590 n.770.
    \186\ The annual burden per existing Form ATS-R respondent would 
be 0.75 hours x 4 quarterly filings annually = 3 burden hours. See 
id. at 15590 n.771.

----------------------------------------------------------------------------------------------------------------
                                                                                          Total annual burden
                                             Number of          Annual burden per      (number of  respondents x
            Respondent type                 respondents             respondent             annual burden per
                                                                                              respondent)
----------------------------------------------------------------------------------------------------------------
Newly Designated ATSs..................                 46  19 hours.................  874 hours.
----------------------------------------------------------------------------------------------------------------

e. Rule 301(b)(10) Burden on Newly Designated ATSs
    As discussed in the Proposing Release, the Commission estimates an 
initial burden of 8 hours \187\ and an annual burden of 4 hours \188\ 
per respondent for complying with Rule 301(b)(10). In light of the 
revision of the Commission's estimate of Newly Designated ATSs, the 
Commission estimates the following total initial and annual burdens:
---------------------------------------------------------------------------

    \187\ The Commission's currently approved baseline for the 
average initial compliance burden is 8 hours (Attorney at 7 hours + 
Compliance Clerk at 1 hour). See Rule 301 PRA Supporting Statement.
    \188\ The Commission's currently approved baseline for the 
average ongoing compliance burden is 4 hours (Attorney at 2 hours + 
Compliance Clerk at 2 hours). See id.

----------------------------------------------------------------------------------------------------------------
                                                                                                 Total burden
                                                                                                  (number of
           Burden type              Respondent type        Number of          Burden per         respondents x
                                                          respondents         respondent          burden per
                                                                                                  respondent)
----------------------------------------------------------------------------------------------------------------
Initial.........................  Newly Designated                    46  8 hours...........  368 hours.
                                   ATSs.
Annual..........................  ...................  .................  4 hours...........  184 hours.
----------------------------------------------------------------------------------------------------------------

2. Burden of Rules 302 and 303 of Regulation ATS on Newly Designated 
ATSs
---------------------------------------------------------------------------

    \189\ The Commission's currently approved baseline for the 
average compliance burden is 45 hours (Compliance Clerk at 45 
hours). See Extension Without Change of a Currently Approved 
Collection: Rule 302 (17 CFR 242.302) Recordkeeping Requirements for 
Alternative Trading Systems; ICR Reference No. 201906-3235-011; OMB 
Control No. 3235-0510 (Oct. 24, 2019), available at https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=201906-3235-011. 
There is no initial burden associated with this rule.

    As discussed in the Proposing Release, the Commission estimates an 
annual burden of 45 hours per respondent to comply with Rule 302 \189\ 
and 15 hours to comply with Rule 303.\190\ In light of the revision of 
the Commission's estimate of Newly Designated ATSs, the Commission 
estimates the following total annual burdens:
---------------------------------------------------------------------------

    \190\ The Commission's currently approved baseline for the 
average compliance burden is 15 hours (Compliance Clerk at 15 
hours). See Extension Without Change of a Currently Approved 
Collection: Rule 303 (17 CFR 242.303) Record Preservation 
Requirements for Alternative Trading Systems; ICR Reference No. 
202101-3235-010; OMB Control No. 3235-0505 (June 25, 2021), 
available at https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=202101-3235-010. There is no initial burden 
associated with this rule.

[[Page 29468]]

----------------------------------------------------------------------------------------------------------------
                                                                                                 Total annual
                                                                                               burden (number of
              Rule                  Respondent type        Number of       Annual burden per     respondents x
                                                          respondents         respondent       annual burden per
                                                                                                  respondent)
----------------------------------------------------------------------------------------------------------------
Rule 302........................  Newly Designated                    46  45 hours..........  2,070 hours.
                                   ATSs.
Rule 303........................  ...................  .................  15 hours..........  690 hours.
----------------------------------------------------------------------------------------------------------------

3. Burden of Rule 304 of Regulation ATS and Form ATS-N on Newly 
Designated ATSs

    As discussed in the Proposing Release, the Commission estimates an 
initial compliance burden of 136.4 hours per new Form ATS-N respondent 
\191\ and an annual burden of 47 hours.\192\ In light of the revision 
of the Commission's estimate of Newly Designated ATSs, the Commission 
estimates the following total annual burdens:
---------------------------------------------------------------------------

    \191\ The Commission's currently approved baseline for the 
average initial compliance burden for each initial Form ATS-N is 
130.4 hours (currently approved baseline burden to complete an 
initial Form ATS at 20 hours: Attorney at 13 hours and Compliance 
Clerk at 7 hours; see Proposing Release at 15588 n.759) + (Part I at 
0.5 hour) + (Part II at an average of 29 hours) + (Part III at an 
average of 78.75 hours) + (Access to EDGAR at 0.15 hours) + (Posting 
link to published Form ATS-N on ATS website at 2 hours) = 130.4 
burden hours. See Extension Without Change of a Currently Approved 
Collection: Regulation ATS Rule 304 and Form ATS-N; ICR Reference 
No. 202109-3235-014; OMB Control No. 3235-0763 (January 3, 2022), 
available at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202109-3235-014 (``Rule 304 PRA Supporting 
Statement''). The aggregate totals by professional, including the 
baseline, are estimated to be approximately 54.6 hours for an 
Attorney, 0.5 hours for a Chief Compliance Manager, 34.55 hours for 
a Compliance Manager, 32.25 hours for a Senior Systems Analyst, 1 
hour for a Senior Marketing Manager, and 7.5 hours for a Compliance 
Clerk. The Commission estimates that the proposed amendments to Form 
ATS-N would add an additional burden of 6 hours per filing (Attorney 
at 2.5 hours, Compliance Manager at 1.5 hours, Senior Systems 
Analyst at 1.5 hours, and Compliance Clerk at 0.5 hours), and 
therefore the average compliance burden for each new Form ATS-N 
filer would be 136.4 hours. See Proposing Release at section V.B and 
section VII.E (discussing proposed changes).
    \192\ The currently approved baseline for filing amendments to 
Form ATS-N is 47 hours ((Attorney at 5.5 hours + Compliance Manager 
at 2 hours + Compliance Clerk at 1.9 hours) x 5 amendments a year). 
See Rule 304 PRA Supporting Statement.

----------------------------------------------------------------------------------------------------------------
                                                                                                  Total burden
                                                                                                   (number of
                                                                                                 respondents x
                                                                  Number of      Burden per        burden per
             Burden type                  Respondent type        respondents     respondent       respondent,
                                                                                   (hours)         rounded to
                                                                                                  nearest 0.5
                                                                                                     hours)
----------------------------------------------------------------------------------------------------------------
Initial.............................  Newly Designated ATSs..               9           136.4            1,227.5
Annual..............................  .......................  ..............              47                423
----------------------------------------------------------------------------------------------------------------

4. Burden of Rule 15b1-1 and Form BD on Newly Designated ATSs
    As discussed in the Proposing Release, the Commission estimates an 
initial burden of 2.75 hours \193\ and an annual burden of 1 hour \194\ 
per respondent for completing Form BD. In light of the revision of the 
Commission's estimate of Newly Designated ATSs, the Commission 
estimates the following total initial and annual burdens:
---------------------------------------------------------------------------

    \193\ The Commission's currently approved baseline for the 
average initial compliance burden for each Form BD is 2.75 hours 
(Compliance Manager at 2.75 hours). See Extension Without Change of 
a Currently Approved Collection: Form BD and Rule 15b1-1. 
Application for registration as a broker-dealer; ICR Reference No. 
201905-3235-016; OMB Control No. 3235-0012 (Aug. 7, 2019), available 
at https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=201905-3235-016. (``Form BD PRA Supporting Statement'').
    \194\ The Commission's currently approved baseline for the 
average ongoing compliance burden for each respondent amending Form 
BD is 0.95 hours (Compliance Manager at 0.33 hours x 2.87 amendments 
per year). See Form BD PRA Supporting Statement.

----------------------------------------------------------------------------------------------------------------
                                                                                                  Total burden
                                                                                                   (number of
                                                                                                 respondents x
                                                                  Number of      Burden per        burden per
             Burden type                  Respondent type        respondents     respondent       respondent,
                                                                                   (hours)         rounded to
                                                                                                  nearest 0.5
                                                                                                     hours)
----------------------------------------------------------------------------------------------------------------
Initial.............................  Newly Designated ATSs..              27            2.75                 74
Annual..............................  .......................  ..............            0.95               25.5
----------------------------------------------------------------------------------------------------------------

[[Page 29469]]

5. Burden of Form ID on Newly Designated ATSs
    As discussed in the Proposing Release, the Commission estimates, 
with regards to Rule 101 of Regulation S-T, an initial burden of 0.15 
hours \195\ and no annual burden per respondent for completing Form ID. 
In light of the revision of the Commission's estimate of Newly 
Designated ATSs, the Commission estimates the following total burdens:
---------------------------------------------------------------------------

    \195\ See Revision of a Currently Approved Collection: Form ID--
EDGAR Password; ICR Reference No. 202104-3235-022; OMB Control No. 
3235-0328 (Apr. 29, 2021), available at https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=202104-3235-022.

----------------------------------------------------------------------------------------------------------------
                                                                                                 Total initial
                                                                                               burden (number of
                                                                                                 respondents x
                    Respondent type                         Number of     Initial burden per  initial burden per
                                                           respondents    respondent (hours)      respondent,
                                                                                              rounded to nearest
                                                                                                  0.5 hours)
----------------------------------------------------------------------------------------------------------------
Newly Designated ATSs..................................              27                0.15                   4
----------------------------------------------------------------------------------------------------------------

6. Burden of Regulation SCI on Newly Designated ATSs
    The Commission does not estimate any Newly Designated ATSs that 
trade crypto asset securities or that have exited, entered, or intend 
to enter the market since the Commission issued the Proposing Release 
will be subject to Regulation SCI,\196\ and therefore, the estimates in 
the Proposing Release remain unchanged.
---------------------------------------------------------------------------

    \196\ ``Regulation SCI'' consists of 17 CFR 242.1000 through 
242.1007.
---------------------------------------------------------------------------

C. Request for Comments

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comments to:
    39. Evaluate whether the proposed collection of information is 
necessary for the proper performance of the Commission's functions, 
including whether the information shall have practical utility;
    40. Evaluate the accuracy of the Commission's estimates of the 
burden of the proposed collection of information;
    41. Determine whether there are ways to enhance the quality, 
utility, and clarity of the information to be collected;
    42. Evaluate whether there are ways to minimize the burden of 
collection of information on those who are to respond, including 
through the use of automated collection techniques or other forms of 
information technology; and
    43. Evaluate whether the proposed amendments would have any effects 
on any other collection of information not previously identified in 
this section.
    Persons submitting comments on the collection of information 
requirements should direct them to the Office of Management and Budget, 
Attention: Desk Officer for the Securities and Exchange Commission, 
Office of Information and Regulatory Affairs, Washington, DC 20503, and 
should also send a copy of their comments to Vanessa Countryman, 
Secretary, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-1090, with reference to File Number S7-02-22. 
Requests for materials submitted to Office of Management and Budget 
(``OMB'') by the Commission with regard to this collection of 
information should be in writing, with reference to File Number S7-02-
22 and be submitted to the Securities and Exchange Commission, Office 
of FOIA/PA Services, 100 F Street NE, Washington, DC 20549-2736. As OMB 
is required to make a decision concerning the collection of information 
between 30 and 60 days after publication, a comment to OMB is best 
assured of having its full effect if OMB receives it within 30 days of 
publication.

V. Economic Analysis

A. Introduction

    The Commission received comments on the Proposing Release stating 
that the Commission had not considered the economic effects of the 
Proposed Rules on New Rule 3b-16(a) Systems that trade crypto asset 
securities.\197\ In this section the Commission is supplementing the 
economic analysis provided in the Proposing Release with additional 
analysis that considers the impact of the Proposed Rules on New Rule 
3b-16(a) Systems that trade crypto asset securities.\198\
---------------------------------------------------------------------------

    \197\ See GDCA Letter II at 4, 5, and 6; Crypto Council Letter 
at 2, 3, 4, and 5; McHenry/Huizenga Letter at 2; LeXpunK Letter at 
3; ADAM Letter II at 13 and 14; Chamber Letter at 4; Coinbase Letter 
at 2 and 6; a16z Letter at 2, 3, 7, 20 and 21; Blockchain 
Association Letter II at 1 and 7; DeFi Education Fund Letter at 3.
    \198\ Exchange Act section 3(f) requires the Commission, when it 
is engaged in rulemaking pursuant to the Exchange Act and is 
required to consider or determine whether an action is necessary or 
appropriate in the public interest, to consider, in addition to the 
protection of investors, whether the action will promote efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f). In 
addition, Exchange Act section 23(a)(2) requires the Commission, 
when making rules pursuant to the Exchange Act, to consider among 
other matters the impact that any such rule would have on 
competition and not to adopt any rule that would impose a burden on 
competition that is not necessary or appropriate in furtherance of 
the purposes of the Exchange Act. See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The Commission preliminarily believes that some amount of crypto 
asset securities trade on New Rule 3b-16(a) Systems. These New Rule 3b-
16(a) Systems do not meet the current definition of an exchange and 
thus are not subject to regulation either as a national securities 
exchange or an ATS. By amending Exchange Act Rule 3b-16 to include New 
Rule 3b-16(a) Systems within the definition of exchange, the Proposed 
Rules would functionally apply Regulation ATS to an additional number 
of entities not currently regulated by it. This would have a number of 
benefits, including enhanced regulatory oversight and protection for 
investors, a reduction in trading costs and improvement in execution 
quality, and enhancement of price discovery and liquidity.
    The Proposed Rules would also have costs for those entities subject 
to new requirements, including compliance costs associated with filing 
forms such as Form ATS-N or Form ATS, protecting confidential 
information, keeping certain records, registering as a broker-dealer, 
and complying with the Fair Access Rule and/or Regulation SCI if 
applicable.
    For purposes of measuring the effects of the proposed rule on 
participants in crypto asset securities markets, this analysis assumes 
that market participants are compliant with existing applicable 
Commission and FINRA rules, including those requiring registration and 
the rules and regulations applicable to such registered

[[Page 29470]]

entities. To the extent that some entities engaged in activities 
involving crypto asset securities are not, but should be, FINRA or 
Commission registered entities, they may incur additional costs to 
comply with existing rules and registration obligations that are 
distinct from the costs associated with the Proposed Rules and are not 
discussed in this analysis. Similarly, any benefits from coming into 
compliance with existing rules and registration obligations are also 
not discussed in this analysis, and effects on efficiency, competition, 
and capital formation may differ from the discussion in this analysis 
to the extent impacted entities do not comply with existing applicable 
Commission or FINRA rules. For such entities, we expect the benefits 
and costs specifically associated with the Proposed Rules to be the 
same as those described below as applicable.

B. Baseline

1. Current State of Crypto Asset Markets
    The global market for crypto assets is valued by some estimates at 
approximately $900 billion,\199\ as of December 2022. Volatility in the 
price of crypto assets has caused this number to fluctuate considerably 
over the past few years. For example, in July of 2020 the market was 
estimated to be worth approximately $276 billion, but went on to reach 
a peak value of approximately $3 trillion by November 2021.\200\ A 
subset of these crypto assets are securities with associated activity 
within the U.S.\201\
---------------------------------------------------------------------------

    \199\ See, e.g., Global Cryptocurrency Market Cap Charts, 
CoinGecko, available at https://www.coingecko.com/en/global-charts 
(last visited on Mar. 15, 2023).
    \200\ Id.
    \201\ The Commission is aware that some amount of activity in 
the market for crypto assets discussed in this Reopening Release is 
conducted outside the U.S. Due to unique challenges in analyzing the 
crypto asset market, the Commission faces obstacles to obtaining 
reliable, comprehensive, and comparable information to determine, in 
this rulemaking, the extent of the activities taking place within 
the U.S. For example, while the issuance of a crypto asset on a 
blockchain can be detected by observers of the blockchain, the 
national or international scope of the activities involving this 
asset is not always readily apparent. Furthermore, many of the 
platforms on which crypto assets are traded do not provide publicly 
available information that could be used to inform the determination 
about the scope of their operations. This is due, in part, to the 
significant amount of trading in crypto asset securities that may be 
occurring in non-compliance with the federal securities laws. See 
also supra note 26 (discussing crypto assets that are securities).
---------------------------------------------------------------------------

    The Commission has limited information regarding crypto asset 
securities.\202\ This limitation is, in part, due to the fact that only 
a small portion of crypto asset security trading activity is occurring 
within entities that are registered with the Commission and any of the 
SROs, or operating pursuant to the Regulation ATS exemption.\203\ For 
example, there are currently no special purpose broker-dealers 
authorized to maintain custody of crypto asset securities.\204\ This 
information limitation is also, in part, due to the significant trading 
activity in crypto asset securities that may be occurring in non-
compliance with the federal securities laws.\205\
---------------------------------------------------------------------------

    \202\ See, e.g., FSOC Report, supra note 30 (``The crypto-asset 
ecosystem is characterized by opacity that creates challenges for 
the assessment of financial stability risks.''); Crypto-Assets 
Treasury Report, supra note 75, at 12 (finding that data pertaining 
to ``off-chain activity'' is limited and subject to voluntary 
disclosure by trading platforms and protocols, with protocols either 
not complying with or not subject to obligations ``to report 
accurate trade information periodically to regulators or to ensure 
the quality, consistency, and reliability of their public trade 
data''); Fin. Stability Bd., Assessment of Risks to Financial 
Stability from Crypto-assets 18-19 (Feb. 16, 2022) (``FSB Report''), 
available at https://www.fsb.org/wp-content/uploads/P160222.pdf 
(finding that the difficulty in aggregating and analyzing available 
data in the crypto asset space ``limits the amount of insight that 
can be gained with regard to the [crypto asset] market structure and 
functioning,'' including who the market participants are and where 
the market's holdings are concentrated, which, among other things, 
limits regulators' ability to inform policy and supervision); 
Raphael Auer et al., Banking in the Shadow of Bitcoin? The 
Institutional Adoption of Cryptocurrencies 4, 9 (Bank for Int'l 
Settlements, Working Paper No. 1013, May 2022), available at https://www.bis.org/publ/work1013.pdf (stating that data gaps, which can be 
caused by limited disclosure requirements, risk undermining the 
ability for holistic oversight and regulation of cryptocurrencies); 
Int'l Monetary Fund, The Crypto Ecosystem and Financial Stability 
Challenges, in Global Financial Stability Report 41, 47 (Oct. 2021), 
available at https://www.imf.org/-/media/Files/Publications/GFSR/2021/October/English/ch2.ashx (finding that crypto asset service 
providers provide limited, fragmented, and, in some cases, 
unreliable data, as the information is provided voluntarily without 
standardization and, in some cases, with an incentive to manipulate 
the data provided).
    \203\ For a description of the requirements of the Regulation 
ATS exemption, see Proposing Release at section II.E.2.
    \204\ For background on 17 CFR 240.15c3-3 (``Rule 15c3-3''), as 
it relates to crypto asset securities, see U.S. Sec. & Exch. Comm'n, 
Joint Staff Statement on Broker-Dealer Custody of Digital Asset 
Securities (July 8, 2019) (``Joint Staff Statement on Broker-Dealer 
Custody of Digital Asset Securities''), available at https://www.sec.gov/news/public-statement/joint-staff-statement-broker-dealer-custody-digital-asset-securities; Fin. Indus. Regul. Auth., 
SEC Staff No-Action Letter, ATS Role in the Settlement of Digital 
Asset Security Trades (Sept. 25, 2020), available at https://www.sec.gov/divisions/marketreg/mr-noaction/2020/finra-ats-role-in-settlement-of-digital-asset-security-trades-09252020.pdf. Staff 
reports, Investor Bulletins, and other staff documents (including 
those cited herein) represent the views of Commission staff and are 
not a rule, regulation, or statement of the Commission. The 
Commission has neither approved nor disapproved the content of these 
staff documents and, like all staff statements, they have no legal 
force or effect, do not alter or amend applicable law, and create no 
new or additional obligations for any person. The Commission issued 
a statement describing its position that, for a period of five 
years, special purpose broker-dealers operating under the 
circumstances set forth in the statement will not be subject to a 
Commission enforcement action on the basis that the broker-dealer 
deems itself to have obtained and maintained physical possession or 
control of customer fully paid and excess margin crypto asset 
securities for purposes of Rule 15c3-3(b)(1) under the Exchange Act. 
See Commission Statement on Custody of Digital Asset Securities by 
Special Purpose Broker-Dealers. To date, no such special purpose 
broker-dealer registration applications have been granted by FINRA.
    \205\ See also FSOC Report, supra note 30, at 5, 87, 94, 97 
(emphasizing the importance of the existing financial regulatory 
structure while stating that certain digital asset platforms may be 
listing securities while not in compliance with exchange, broker-
dealer, or other registration requirements, which may impose 
additional risk on banks and investors and result in ``serious 
consumer and investor protection issues''); Crypto-Assets Treasury 
Report, supra note 49, at 26, 29, 39, 40 (stating that issuers and 
platforms in the digital asset ecosystem may be acting in non-
compliance with statutes and regulations governing traditional 
capital markets, with market participants that actively dispute the 
application of existing laws and regulations, creating risks to 
investors from non-compliance with, in particular, extensive 
disclosure requirements and market conduct standards); FSB Report, 
supra note 202, at 4, 8, 18 (stating that some trading activity in 
crypto assets may be failing to comply with applicable laws and 
regulations, while failing to provide basic investor protections due 
to their operation outside of or in non-compliance with regulatory 
frameworks, thereby failing to provide the ``market integrity, 
investor protection or transparency seen in appropriately regulated 
and supervised financial markets'').
---------------------------------------------------------------------------

    Because of this limited information, and because, as the Commission 
understands, the trading of crypto asset securities utilizes different 
technology and methods of operation than is utilized in markets for 
non-crypto asset securities, the Commission has a greater degree of 
uncertainty in characterizing the baseline for the crypto asset market 
than it does in characterizing the baseline for non-crypto asset 
securities.
    It is impossible to determine the true market turnover \206\ for 
crypto assets, because, among other reasons, the crypto asset market 
reportedly is characterized \207\ by rampant wash

[[Page 29471]]

trading.\208\ The Commission does possess data on reported trades from 
many crypto asset platforms, but there is no reliable way to determine 
whether trades reported are actually between two different market 
participants or are the result of wash trading. Estimates of how much 
of the total crypto asset market volume is attributable to wash trades 
vary but range as high as 95%.\209\ The Commission believes that with 
such pervasive wash trading, any reported volume figures are 
significantly misleading.
---------------------------------------------------------------------------

    \206\ That is, the amount of crypto assets that actually change 
hands between distinct market participants.
    \207\ See, e.g., Lin William Cong, Xi Li, Ke Tang & Yang Yang, 
Crypto Wash Trading (Nat'l Bureau of Econ. Rsch., Working Paper No. 
30783, Dec. 2022), available at https://www.nber.org/papers/w30783, 
Andrew Singer, Cleaning Up Crypto Exchange Wash Trading Will Take 
Global Regulation, Cointelegraph (July 29, 2020), available at 
https://cointelegraph.com/news/cleaning-up-crypto-exchange-wash-trading-will-take-global-regulation (according to Gerald Chee, head 
of research at CoinMarketCap.com, ``there is no way to tell if an 
exchange is inflating volume or not by merely looking at the volume 
they report'' because ``[t]he only way to detect `wash trades' would 
require access to `account-ID' data'' and ``only exchanges have 
access to these [data]''); see also, e.g., Friedhelm Victor & Andrea 
Marie Weintraud, Detecting and Quantifying Wash Trading on 
Decentralized Cryptocurrency Exchanges (Working Paper, Feb. 13, 
2021), available at https://arxiv.org/pdf/2102.07001.pdf.
    \208\ The term wash trading refers to the practice of creating 
misleading trade reports and delivering such reports to the public, 
usually to deceive market participants into believing volume in a 
particular instrument is higher than it actually is. This is often 
arranged by trading against one's own limit orders, or buy swapping 
the instrument back and forth with a collaborator.
    \209\ See, e.g., Bitwise Asset Management, Presentation to the 
Securities and Exchange Commission (Mar. 19, 2019), available at 
https://www.sec.gov/comments/sr-nysearca-2019-01/srnysearca201901-5164833-183434.pdf (stating that only 4.5% of approximately $6 
billion of reported trading in Bitcoin was real). See also Javier 
Paz, More Than Half of All Bitcoin Trades are Fake, Forbes (Aug. 26, 
2022), available at https://www.forbes.com/sites/javierpaz/2022/08/26/more-than-half-of-all-bitcoin-trades-are-fake/?sh=471e51be6681.
---------------------------------------------------------------------------

    Because such wash trading renders volume data unusable, the 
Commission is also unable to determine the share of trading that takes 
place on various types of platforms; or the amount of concentration in 
volume among various exchanges, including whether a given exchange has 
any legitimate volume at all.
    It is likewise impractical to determine market turnover of crypto 
assets using data on transfer of crypto assets between wallets that is 
available via public blockchains. The Commission preliminarily believes 
that a direct analysis of blockchain data would be unable to reliably 
determine how many crypto assets are actually moving between different 
entities. Among other complications, the Commission understands that it 
is a common practice for a single entity participating in crypto asset 
trading to control multiple wallets and to move funds between those 
wallets. There may be no way of determining that movement between such 
wallets represents the exchange of crypto assets between distinct 
entities. Additionally, because transactions on the blockchain can be 
costly and slow, the Commission understands crypto assets to sometimes 
trade and settle off-chain, with only changes between public addresses 
eventually appended to the blockchain. Thus, even if one could 
determine changes in ownership from transfers on the blockchain, that 
might not reflect all changes of ownership that occur on off-chain 
platforms.
a. Platforms in the Market for Crypto Assets
    The Commission is unable to reliably determine the amount of 
trading in crypto assets that takes place through platforms, or to 
quantify their share of the market for trading services in crypto 
assets. This is due to the wash trading problem in the crypto asset 
market discussed above.\210\ The Commission is also unable to reliably 
determine the number of platforms operating in the crypto asset 
market.\211\
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    \210\ See supra section V.B.1. The difficulties in computing 
volume is also due in part to the significant amount of trading in 
crypto asset securities that may be occurring in non-compliance with 
federal securities laws. See supra section V.B.1.
    \211\ While the Commission is uncertain about the total number 
of platforms, some existing estimates of this number are over 200 
for certain kinds of platforms, and over 250 for other kinds of 
platforms. See, e.g., Top Cryptocurrency Spot Exchanges, 
CoinMarketCap, available at https://coinmarketcap.com/rankings/exchanges/, Top Cryptocurrency Decentralized Exchanges, 
CoinMarketCap, available at https://coinmarketcap.com/rankings/exchanges/dex/; see also Bloomberg Letter II at 3; see supra section 
V.B.1. discussing difficulties in determining the size and scope of 
the crypto asset market generally, including issues related to 
foreign activity and non-compliance. See infra section V.B.1.c 
(where the Commission has provided a rough estimate of the number of 
Communication Protocol Systems in the market for crypto asset 
securities).
---------------------------------------------------------------------------

    Some platforms may operate through the use of smart contracts.\212\ 
A smart contract may be designed to accept and integrate changes to its 
functionality, or it may be immutable.\213\ Different designs are used 
to control changes to a smart contract's functionality, including 
designs that enable only very specific entities to submit changes to 
the smart contract, as well as designs where a number of market 
participants receive tokens theoretically enabling them to vote on 
whether a change proposed by a developer is integrated or not.\214\ The 
Commission understands that these tokens, or other tokens, may also 
entitle their holders to additional benefits, which may include a claim 
on some portion of the transaction fees paid to the smart contract.
---------------------------------------------------------------------------

    \212\ See supra note 15. Smart contracts generally can be 
appended to a blockchain capable of running such programs by anyone 
with the ability to submit transactions to it. The Commission 
understands that not all blockchains are initially designed with the 
intention of enabling smart contract functionality.
    \213\ By ``immutable,'' the Commission means that the smart 
contract cannot be changed through the processes that are part of 
the typical functioning of a blockchain. The miners or validators of 
the blockchain, by deviating from such processes, can make 
alterations to the blockchain that alter interactions with 
``immutable'' smart contracts. See infra section V.C.2.c.i for 
related discussion.
    \214\ Such tokens are sometimes referred to as governance 
tokens.
---------------------------------------------------------------------------

i. Operations of Platforms
    The Commission understands that some platforms for crypto assets 
operate limit order books to facilitate trading among their customers. 
Some operators of platforms also operate an affiliated so-called over-
the-counter system or an RFQ system.\215\ Colocation options are 
possible at some platforms.\216\
---------------------------------------------------------------------------

    \215\ See Elias Ahonen, What Really Goes on at a Crypto OTC 
Desk?, Cointelegraph (May 16, 2022), available at https://cointelegraph.com/magazine/explained-what-really-crypto-otc-desk/.
    \216\ See Anna Baydakova, High-Frequency Trading is Newest 
Battleground in Crypto Exchange Race, CoinDesk (July 8, 2019), 
available at https://www.coindesk.com/markets/2019/07/08/high-frequency-trading-is-newest-battleground-in-crypto-exchange-race/.
---------------------------------------------------------------------------

    The Commission preliminarily believes that platforms can be a 
source of pricing information for the crypto assets that trade on those 
platforms. Pricing information from off-chain platforms is sometimes 
supplied to blockchains to serve as a reference price for various 
entities using smart contracts in their systems.\217\
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    \217\ See, e.g., Andrei Anisimov & Luke Youngblood, Introducing 
the Coinbase Price Oracle, Coinbase (Apr. 23, 2020), available at 
https://www.coinbase.com/blog/introducing-the-coinbase-price-oracle. 
See also infra section V.B.1.a for further discussion of using price 
information from centralized platforms in DeFi settings.
---------------------------------------------------------------------------

    Some entities run limit order books on the blockchain, by utilizing 
smart contracts that accept limit orders, display them, and match limit 
orders with market orders. In a system using a limit order book where 
all activity takes place on-chain, traders must pay for blockchain 
transactions for each message they wish to send to the limit order 
book, in addition to any fees the limit order book may charge. This can 
increase the sources of transaction cost relative to a platform that 
does not run its limit order book on-chain. Some entities with an on-
chain component to their system may run their limit order books in 
whole or in part off-chain, with only final transactions being posted 
to the blockchain. This may help both reduce total fees paid by users 
and issues of latency in updating on-chain records.
    An AMM is designed as an alternative to a limit order book.\218\ An 
AMM typically offers liquidity by exchanging one crypto asset for 
another,\219\ with the

[[Page 29472]]

exchange rate typically set according to a pre-specified formula. In 
some cases, this formula is set only by a mathematical function of the 
inventory the AMM possesses of each crypto asset in the pair,\220\ 
while in other cases the AMM may incorporate information from an off-
chain platform to help inform the exchange rate. The inventory that an 
AMM uses to fill orders is typically supplied by market participants, 
and the details of the smart contract may specify compensation for 
supplying inventory (e.g., by dividing up transaction fees among the 
inventory suppliers). In some cases, the AMM may permit the inventory 
suppliers to restrict the use of their liquidity to pre-specified price 
ranges.
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    \218\ AMMs typically make use of smart contracts to enable their 
functionality, and as a consequence may run on-chain to a 
significant degree.
    \219\ The inventory held by an AMM for providing liquidity is 
typically called a pool. A single AMM protocol will typically have 
many pools, one for each combination of crypto asset trades offered. 
For example, for crypto assets A, B, and C, a single AMM protocol 
might have a pool that offers to trade A for B and vice versa, 
another pool that offers to trade B for C and vice versa, and a 
third pool that offers to trade A for C and vice versa. Some AMMs 
can have pools with more than two assets that permit trades in 
combinations of the assets in the pool. For example, a pool might 
contain A, B, and C, and permit trades such as exchanging A and B 
for C.
    \220\ In the case where the AMM offers pools with more than two 
assets, the formula may be based on the amount of each asset held in 
the pool.
---------------------------------------------------------------------------

    The Commission understands that while some platforms provide 
markets that enable the trading of crypto assets for dollars or other 
fiat currency, platforms for crypto assets typically offer markets in 
trading pairs as well. This means that, for example, an order on a 
limit order book may offer to buy or sell units of a base asset in 
exchange for a quote asset with the price expressed in units of the 
quote asset.\221\ In addition, some platforms focus on facilitating 
trades where the transaction takes place entirely ``on-chain.'' In this 
case, the platform is unable to facilitate crypto asset markets using 
fiat currency. Instead, such systems can only facilitate trading in 
crypto asset pairs.
---------------------------------------------------------------------------

    \221\ See supra section II.A for additional discussion of pairs 
trading.
---------------------------------------------------------------------------

    The Commission understands that the majority of platforms typically 
require crypto assets and fiat currency to be provided to the platform 
in advance of any trading activity. This requirement can help ensure 
the successful completion of trades.
    A variety of market participants use platforms to trade crypto 
assets. The Commission understands that retail investors are 
significant users of platforms.\222\ The Commission also understands 
that some platforms may also be used to fill the orders of 
institutional investors, and may have market makers participating as 
well.
---------------------------------------------------------------------------

    \222\ See, e.g., Michel Rauchs, Apolline Blandin, Kristina 
Klein, Gina Pieters, Martino Recanatini & Bryan Zhang, 2nd Global 
Cryptoasset Benchmarking Study (Dec. 2018), available at https://www.jbs.cam.ac.uk/wp-content/uploads/2020/08/2019-09-ccaf-2nd-global-cryptoasset-benchmarking.pdf, showing that globally, retail 
investors are 70% of ``exchange-only'' crypto business users and 78% 
of ``multi-segment'' crypto businesses. See also 2022 10-K, Coinbase 
(Feb. 21, 2023), available at https://www.sec.gov/Archives/edgar/data/1679788/000167978823000031/coin-20221231.htm showing that for 
one centralized platform, retail investors accounted for 
approximately 20% of trading volume in 2022.
---------------------------------------------------------------------------

    The Commission understands that the speed of processing on some 
platforms may be faster when compared to transfers on some blockchains 
or systems that involve blockchain processing as part of 
functionality,\223\ both of which are reliant on blockchain 
transactions to function. The Commission understands that there is 
often a queue of transactions waiting to be appended to a blockchain, 
and transactions being sent to a trading platform running on that 
blockchain may have to wait in that queue to be processed.
---------------------------------------------------------------------------

    \223\ See infra section V.B.1.c.
---------------------------------------------------------------------------

    Trading using systems that involve sending information to a 
blockchain \224\ as a means of interacting with the system may expose 
the market participant to information leakage of a kind that is not 
present on platforms or New Rule 3b-16(a) Systems that do not require 
interacting through a blockchain. The Commission understands that 
messages to be appended to a blockchain often end up in queue that is 
publicly viewable, which then exposes the market participant to 
information leakage.
---------------------------------------------------------------------------

    \224\ For example, sending a transaction to an AMM running on-
chain.
---------------------------------------------------------------------------

    Furthermore, when trading on a system that runs some of its 
functionality on-chain, there is a risk of unexpected or undesired 
execution results. Specifically, a market participant may send an order 
to a blockchain intending to interact with the on-chain portion of the 
system based on market conditions which will be altered by other 
transactions that are already queued but not yet processed.\225\
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    \225\ The Commission understands that some platforms which have 
this risk permit transaction messages to set limits to help mitigate 
the risk of unexpected execution results. Although the problem of 
messages already en route or queued for processing causing 
unexpected changes to a trading platform for other users is a 
problem on off-chain platforms as well, the Commission understands 
that the problem may be more severe on platforms which require 
interaction through a blockchain because the longer processing times 
can lead to larger queues.
---------------------------------------------------------------------------

    Some ATSs, which have an active Form ATS on file with the 
Commission, specify in their Form ATS disclosures that they trade or 
intend to trade crypto asset securities.
ii. Regulatory Baseline
    The provider of a platform that meets the current criteria of Rule 
3b-16 of the Exchange Act is required to register as a national 
securities exchange or operate pursuant to the Regulation ATS 
exemption, which involves registering as a broker-dealer and complying 
with Regulation ATS.\226\ The regulatory requirements and the 
associated compliance costs for platforms that trade crypto asset 
securities vary according to whether they are regulated as a national 
securities exchange or ATS.
---------------------------------------------------------------------------

    \226\ See supra section V.B.1.a.i, discussing ATSs that trade or 
intend to trade crypto asset securities. There are no registered 
national securities exchanges which trade crypto asset securities. 
See supra section V.B.1.
---------------------------------------------------------------------------

    A platform that trades crypto asset securities could choose to 
register as a national securities exchange pursuant to sections 5 and 6 
of the Exchange Act.\227\ The compliance costs associated with being a 
national securities exchange are generally significantly higher than 
those of being an ATS. In contrast to an ATS, a national securities 
exchange, as an SRO, incurs compliance costs associated with, among 
other things, setting standards of conduct for its members, 
administering examinations for compliance with these standards, 
coordinating with other SROs with respect to the dissemination of 
consolidated market data, and generally taking responsibility for 
enforcing its own rules and the provisions of the Exchange Act and the 
rules and regulations thereunder. Furthermore, under section 19(b) of 
the Exchange Act, a national securities exchange incurs compliance 
costs by filing any proposed changes to its rules with the Commission, 
which the Commission has the authority to approve or disapprove.\228\
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    \227\ Pursuant to section 6 of the Exchange Act, national 
securities exchanges must establish rules that generally: (1) are 
designed to prevent fraud and manipulation, promote just and 
equitable principles of trade, and protect investors and the public 
interest; (2) provide for the equitable allocation of reasonable 
fees; (3) do not permit unfair discrimination; (4) do not impose any 
unnecessary or inappropriate burden on competition; and (5) with 
limited exceptions, allow any broker-dealer to become a member. 
Section 6(b) of the Exchange Act requires, among other things, that 
the national securities exchange be so organized and have the 
capacity to carry out the purposes of the Exchange Act and to comply 
and enforce compliance by its members, and persons associated with 
its members, with the federal securities laws and the rules of the 
exchange. See section 6(b) of the Exchange Act.
    \228\ See generally section 19(b) of the Exchange Act.
---------------------------------------------------------------------------

    A platform that meets the current definition of an exchange and 
operates pursuant to the ATS exemption must comply with Regulation ATS, 
and

[[Page 29473]]

incurs costs related to compliance with these requirements. To operate 
under the exemption, an ATS must register as a broker-dealer \229\ and 
comply with the filing and conduct obligations associated with being a 
registered broker-dealer, including membership in an SRO, such as 
FINRA,\230\ and compliance with the SRO's rules.\231\ Upon becoming a 
broker-dealer, the operator of an ATS is subject to certain broker-
dealer requirements with respect to maintaining net capital, reporting, 
and recordkeeping.\232\ An ATS is subject to Commission examinations 
and FINRA examinations and surveillance, trade reporting obligations, 
and certain investor protection rules.\233\ An ATS is required to 
establish adequate written safeguards and written procedures \234\ to 
protect subscribers' confidential trading information.\235\ 
Furthermore, an ATS is subject to certain reporting and disclosure 
requirements, as applicable. Under Rule 301(b)(2) of Regulation ATS, an 
ATS that does not trade NMS stocks must file Form ATS.\236\ An ATS must 
file quarterly Form ATS-R to report to the Commission, among other 
things, trading volume, securities traded, and a list of subscribers 
that were participants during the relevant quarter.\237\ An ATS is 
subject to recordkeeping and record preservation requirements under 
Rules 302 and 303 of Regulation ATS, respectively.
---------------------------------------------------------------------------

    \229\ The broker-dealer operator controls all aspects of the 
operation of the ATS and is legally responsible for ensuring that 
the ATS complies with applicable federal securities laws and the 
rules and regulations thereunder, including Regulation ATS. See NMS 
Stock ATS Adopting Release at text accompanying note 663.
    \230\ See section 15(b)(8) of the Exchange Act.
    \231\ See Regulation ATS Adopting Release, supra note 3, at 
70903.
    \232\ Registered broker-dealers would be subject to requirements 
under certain Exchange Act rules, such as Rule 15c3-1, Rule 17a-1, 
Rule 17a-3, Rule 17a-4, and Rule 17a-5.
    \233\ Under the federal securities laws and FINRA rules, 
registered broker-dealers (e.g., broker-dealer operators of ATSs) 
are subject to, among other things: (1) various disclosure and 
supervision obligations; (2) anti-money laundering obligations 
(including suspicious activity reporting); (3) FINRA OTC trade 
reporting requirements, including requirements to maintain 
membership in, or maintain an effective clearing arrangement with a 
participant of, a clearing agency registered under the Exchange Act; 
and (4) Commission examinations and FINRA examinations and 
surveillance of members and markets that its members operate.
    \234\ These written safeguards and written procedures must 
include, among other things: limiting access to the confidential 
trading information of subscribers to those employees of the ATS who 
are operating the system or responsible for its compliance with 
these or any other applicable rules; and implementing standards 
controlling employees of the ATS trading for their own accounts.
    \235\ See 17 CFR 242.301(b)(10); NMS Stock ATS Adopting Release, 
supra note 7, section VI.
    \236\ Under Rule 304 of Regulation ATS, NMS Stock ATSs are 
required to file public Form ATS-N (instead of filing Form ATS), 
which is subject to a Commission review and effectiveness process.
    \237\ See Rule 301(b)(9); Form ATS-R.
---------------------------------------------------------------------------

    In addition, an ATS that trades in crypto asset securities that are 
corporate debt securities, and meets certain volume thresholds, is 
required to comply with the Fair Access Rule and Rule 301(b)(6) of 
Regulation ATS. The requirements of Rule 301(b)(6) are similar to, but 
with less benefits and with significantly less costs than, the 
requirements of Regulation SCI.\238\ Such an ATS must be a member of 
FINRA, and would accordingly be required to report to the Trade 
Reporting and Compliance Engine (TRACE) transactions in corporate 
bonds.\239\
---------------------------------------------------------------------------

    \238\ The scope and requirements of Rule 301(b)(6) are narrower 
than those of Regulation SCI. For example, Rule 301(b)(6) of 
Regulation ATS applies to a narrower set of systems, as compared to 
Regulation SCI. Rule 301(b)(6) of Regulation ATS applies only to 
systems that support order entry, order routing, order execution, 
transaction reporting, and trade comparison, which is narrower than 
the definition of SCI system. Also, Rule 301(b)(6) does not require 
ATSs to maintain a backup facility, whereas Regulation SCI includes 
such a requirement.
    \239\ See Proposing Release at 15604 n.871 and accompanying 
text.
---------------------------------------------------------------------------

    An ATS that trades crypto asset securities that are municipal 
securities is similarly required to comply with the Fair Access Rule 
and with Rule 301(b)(6) of Regulation ATS if it meets certain volume 
thresholds. Additionally, the broker-dealer operator of such an ATS 
must register with the Municipal Securities Rulemaking Board (MSRB) and 
accordingly is required to report municipal bond trades to the MSRB's 
Real-Time Transaction Reporting System (RTRS).\240\
---------------------------------------------------------------------------

    \240\ See id. at 15608.
---------------------------------------------------------------------------

    A platform that operates as an NMS Stock ATS and trades in crypto 
asset securities that are NMS stocks is required to file public Form 
ATS-N. Such an ATS must comply with the requirements of Regulation SCI 
and the Fair Access Rule if it meets the corresponding volume 
thresholds. Additionally, because trades in NMS stocks that are 
transacted off-exchange must be reported to one of three FINRA Trade 
Reporting Facilities, such an NMS Stock ATS would have the reporting 
obligation in most cases where it handles the execution of the trade. 
Such an ATS that receives or originates orders in Eligible Securities 
\241\ is required to report any Reportable Event \242\ to the 
Consolidated Audit Trail.
---------------------------------------------------------------------------

    \241\ The CAT NMS Plan is a national market system plan approved 
by the Commission pursuant to Section 11A of the Exchange Act and 
the rules and regulations thereunder. See Securities Exchange Act 
Release No. 79318 (Nov. 15, 2016), 81 FR 84696 (Nov. 23, 2016). The 
CAT NMS Plan and subsequent amendments to the Plan are available at 
https://catnmsplan.com/about-cat/cat-nms-plan. Section 1.1 of the 
CAT NMS Plan defines Eligible Securities as ``(a) all NMS 
Securities; and (b) all OTC Equity Securities,'' where OTC Equity 
Securities are defined as any equity security, other than an NMS 
Security, subject to prompt last sale reporting rules of a 
registered national securities association and reported to one of 
such association's equity trade reporting facilities.'' This 
includes both OTC Equity Securities and transactions in Restricted 
Equity Securities effected pursuant to Securities Act Rule 144A.
    \242\ According to Section 1.1 of the CAT NMS Plan, ``Reportable 
Event'' includes, but is not limited to, the original receipt or 
origination, modification, cancellation, routing, execution (in 
whole or in part) and allocation of an order, and receipt of a 
routed order. See CAT NMS Plan, supra note 241.
---------------------------------------------------------------------------

    A platform that is an ATS and trades in crypto asset equity 
securities that are not NMS stocks is required to comply with 
Regulation SCI and the Fair Access Rule if it meets certain volume 
thresholds, be a member of FINRA, and comply with associated reporting 
obligations.
    AMMs \243\ that meet the definition of a dealer or government 
securities dealer under sections 3(a)(5) and 3(a)(44) of the Exchange 
Act are subject to the requirements applicable to dealers under federal 
securities laws and FINRA rules.\244\ These AMMs would incur compliance 
costs associated with broker-dealer requirements discussed in section 
V.B.1.a.ii.
---------------------------------------------------------------------------

    \243\ Some AMMs may operate as single dealer platforms. A single 
dealer platform that meets the requirement of existing Exchange Act 
Rule 3b-16(b)(2) and Rule 3b-16(b)(2) as proposed to be amended, 
would be excluded from the Exchange Act Rule 3b-16(a) and thus not 
fall within the definition of exchange. In addition, the proposed 
amendments to Rule 3b-16 do not change the registration obligations 
of a person that meets the definition of a dealer or government 
securities dealer under sections 3(a)(5) and 3(a)(44) of the 
Exchange Act.
    \244\ The Commission encourages commenters to review the 
Commission's proposal, ``Further Definition of ``As a Part of a 
Regular Business'' in the Definition of Dealer and Government 
Securities Dealer,'' Securities Exchange Act Release No. 94524 (Mar. 
28, 2022), 87 FR 23054 (Apr. 18, 2022) to determine whether it might 
affect their comments on this Reopening Release.
---------------------------------------------------------------------------

    Regulated platforms do not offer trading in non-cash markets for 
crypto assets in which one of the assets is a security and the other 
one is not a security.\245\
---------------------------------------------------------------------------

    \245\ There is a significant amount of trading in crypto asset 
securities that may be occurring in non-compliance with federal 
securities laws. See supra section V.B.1.
---------------------------------------------------------------------------

b. New Rule 3b-16(a) Systems in the Market for Crypto Assets Securities
    The Commission understands that some amount of trading in crypto 
asset securities is facilitated through New Rule 3b-16(a) Systems.\246\ 
The

[[Page 29474]]

Commission lacks information on the entities involved providing New 
Rule 3b-16(a) Systems in the market for crypto asset securities, and 
consequently, is uncertain as to the precise number of such entities. 
Nevertheless, the Commission is providing a rough estimate that there 
are 15-20 New Rule 3b-16(a) Systems trading crypto asset 
securities.\247\ The Commission requests comment on the number of New 
Rule 3b-16(a) Systems in the market for crypto asset securities. The 
Commission lacks data on the share of trades in crypto asset securities 
that are conducted in this way, and requests comment on this issue.
---------------------------------------------------------------------------

    \246\ See supra section V.B.1. Additionally, one commenter 
states that the proposed amendments to the definition of exchange, 
specifically the phrasing ``to include systems that offer the use of 
non-firm trading interest and communication protocols to bring 
together buyers and sellers of securities,'' could be read to 
encompass ``unhosted protocols,'' which the Commission understands 
to refer to DeFi platforms. See Delphi Digital Letter at 11; see 
also LeXpunK Letter at 3.
    \247\ The Commission received comments stating that we had not 
included an estimate of the number of crypto asset security market 
participants that would be included in the amended definition of 
exchange. See GDCA Letter II at 6, Delphi Digital Letter at 11, 
McHenry/Huizenga Letter at 2.
---------------------------------------------------------------------------

    The Commission is uncertain as to the range of specific 
communication protocols used for trading crypto assets.\248\ The 
Commission requests comment on the types of protocols used in trading 
crypto assets.
---------------------------------------------------------------------------

    \248\ In the Proposing Release, the Commission discussed common 
kinds of protocols and their economic significance in their 
respective markets, see, e.g., Proposing Release sections VIII.B.1, 
VIII.B.2.b, VIII.B.3.b, VIII.B.4.b, VIII.B.5.d, VIII.B.6.b, and 
VIII.B.7.
---------------------------------------------------------------------------

    Some entities provide New Rule 3b-16(a) Systems that may run part 
of the system on-chain (for example, by using smart contracts). A New 
Rule 3b-16(a) System that utilizes such technology may possess some of 
the same features as other systems using that technology described in 
section V.B.1.a.
    The Commission understands that when running a New Rule 3b-16(a) 
System that involves on-chain technology, the actual negotiation 
portion of the system (e.g. the RFQ functions) may be run ``off-
chain,'' that is, without using the blockchain for computation and 
communication. Once negotiation is finished, the transaction may then 
be completed using blockchain-based systems.
    It is also possible that some New Rule 3b-16(a) Systems may be run 
entirely on-chain. For example, there may be smart contracts that 
enable the sending of RFQs, responses to the RFQ, and finalizing of 
transactions all through communicating with a set of smart contracts by 
sending messages to the blockchain.
    The Commission preliminarily believes that New Rule 3b-16(a) 
Systems with on-chain components to their system generally facilitate 
trades that are not cash-based. That is, the trades exchange one crypto 
asset security for another crypto asset. The Commission preliminarily 
believes that it is possible that New Rule 3b-16(a) Systems that do not 
use any on-chain elements in their systems may also facilitate trades 
that are non-cash based.
    New Rule 3b-16(a) Systems do not meet the current definition of 
exchange under Rule 3b-16, and therefore are not currently required to 
register as national securities exchanges or comply with Regulation 
ATS.\249\
---------------------------------------------------------------------------

    \249\ See supra section V.B.1.a.ii describing the rules of 
Regulation ATS, as well as rules applicable to national securities 
exchanges.
---------------------------------------------------------------------------

c. Other Methods of Trading in Crypto Assets
    Market participants may transact in crypto assets via bilateral 
voice trading or electronic chat messaging.\250\ The Commission 
understands that such interactions may be with a market maker in crypto 
assets, or with some other market participant. Such methods of trading 
permit negotiation on price and size. The Commission lacks information 
on current crypto asset market practice, and requests comment on this 
issue.
---------------------------------------------------------------------------

    \250\ See supra section V.B.1.
---------------------------------------------------------------------------

    Bilateral voice trading may provide flexibility to traders and 
reduce information leakage. For these reasons, the Commission 
preliminarily believes it may be a useful method for trading crypto 
assets in large blocks. The Commission requests comment on the role of 
bilateral voice trading in the market for crypto assets.
d. Competition for Crypto Asset Trading Services
    The various platforms available for trading crypto assets, as well 
as New Rule 3b-16(a) Systems, compete to attract order flow. The 
Commission preliminarily believes that market participants seeking 
liquidity in crypto assets may prefer either one particular platform or 
method of crypto asset trading or multiple platforms or methods. A 
single order may be split and filled using the different methods. It is 
also possible that some methods may be used more than others in certain 
segments of market participants.
    Because New Rule 3b-16(a) Systems are not currently subject to the 
same regulation as organizations, associations, or groups of persons 
that meet the existing definition of ``exchange'' under Rule 3b-16, 
they often trade pairs, which can include a combination of securities 
and non-securities. This may give New Rule 3b-16(a) Systems a 
competitive advantage over platforms that currently meet regulatory 
requirements for exchanges.
    Some of the methods for trading crypto asset securities involve 
platforms that are currently subject to regulation as an ATS or 
national securities exchange.\251\ New Rule 3b-16(a) Systems, in 
contrast, are not subject to such regulation. This may have an impact 
on competition for order flow between these two groups of platforms. 
For example, platforms that are ATSs or national securities exchanges 
may offer the benefits of investor protections associated with these 
regulations to customers in ways that New Rule 3b-16(a) Systems do not. 
It is also the case that the compliance costs for such regulations may 
burden current ATSs and national securities exchanges in a way that 
disadvantages them in competing with New Rule 3b-16(a) Systems.
---------------------------------------------------------------------------

    \251\ See supra section V.B.1.a discussing such platforms and 
the regulations to which they are subjected. Also, see supra section 
V.B.1.a.i, discussing ATSs that trade or intend to trade crypto 
asset securities. Today, there are no registered national securities 
exchanges that trade crypto asset securities. See supra section 
V.B.1.
---------------------------------------------------------------------------

C. Economic Effects

    The Commission discussed the economic effects of the Proposed Rules 
on general activity involving securities in the Proposing Release. In 
this section, the Commission discusses the economic effects of the 
Proposed Rules on activity involving crypto asset securities.
    The Commission is relying on the analysis in the Proposing Release 
to form the basis for its discussion of the effects of the Proposed 
Rules for systems trading crypto asset securities.\252\ This is because 
the Commission believes that New Rule 3b-16(a) Systems that trade 
crypto asset securities are broadly similar in their functions to 
functions of other New Rule 3b-16(a) Systems. The following sections 
include discussion of the extent to which we believe these effects may 
deviate from those discussed in the Proposing Release for the market 
for crypto asset securities. Throughout the discussion in this 
Reopening Release, the Commission has a greater degree of uncertainty 
in its analysis of the costs that the Proposed Rules would impose on 
market participants for crypto asset securities than it did in its 
discussion of costs for non-crypto asset securities. This is because 
the Commission has less data

[[Page 29475]]

on the functioning of the market for crypto asset securities.\253\
---------------------------------------------------------------------------

    \252\ See id.
    \253\ See supra section V.B.1.
---------------------------------------------------------------------------

    As discussed in the Proposing Release,\254\ a New Rule 3b-16(a) 
System could choose to register as an exchange rather than choose to 
comply with the Regulation ATS exemption. The Commission believes that 
New Rule 3b-16(a) Systems that trade crypto asset securities would 
likely elect to register as a broker-dealer and comply with Regulation 
ATS because the regulatory costs associated with registering and 
operating as an exchange would be higher than those associated with 
registering as a broker-dealer and complying with Regulation ATS.\255\
---------------------------------------------------------------------------

    \254\ See Proposing Release at 15618.
    \255\ See id. at 15586.
---------------------------------------------------------------------------

    One commenter agrees with the Commission that any entity captured 
as a New Rule 3b-16(a) System ``would likely prefer to be regulated as 
an ATS as opposed to an exchange.'' \256\
---------------------------------------------------------------------------

    \256\ See LeXpunK Letter at 14.
---------------------------------------------------------------------------

1. Benefits
    The Commission believes that the benefits detailed in the Proposing 
Release \257\ would accrue in broadly the same manner to market 
participants who trade in crypto asset securities as they would to 
market participants who trade in the securities discussed in the 
Proposing Release. This is because the Commission believes that New 
Rule 3b-16(a) Systems that trade crypto asset securities are broadly 
similar in their functions to functions of other New Rule 3b-16(a) 
Systems. However, throughout the discussion in this Reopening Release, 
the Commission has a greater degree of uncertainty in its analysis of 
the benefits that the Proposed Rules would provide to market 
participants in the market for crypto asset securities than it did in 
its discussion of benefits for non-crypto asset securities. This is 
because the Commission has less data on the functioning of the market 
for crypto asset securities.\258\
---------------------------------------------------------------------------

    \257\ See id. at 15618.
    \258\ See supra section V.B.1.
---------------------------------------------------------------------------

    Certain benefits discussed in the Proposing Release apply only to 
certain asset classes: the Commission believes that if any current or 
future crypto asset security falls into one of those classes, then 
those benefits would likely apply to the participants in the market for 
that crypto asset security as well.
a. Enhancement of Regulatory Oversight and Investor Protection
    As discussed fully in the Proposing Release, the Proposed Rules 
would enhance regulatory oversight and investor protection by extending 
the requirements related, among other things, to broker-dealer 
registration, transaction reporting, safeguarding subscribers' 
confidential trading information, recordkeeping and reporting under 
Regulation ATS, providing certain information on Form ATS-R to the 
Commission, and filing public Form ATS-N, to New Rule 3b-16(a) Systems 
trading in securities of the applicable asset classes.\259\ Of these 
benefits, some are associated with rules that apply to all securities, 
and the rest are associated with rules that apply only to securities of 
specific asset classes. The Commission believes that benefits 
associated with rules that apply to all securities would accrue to 
market participants trading crypto asset securities in a manner similar 
to the description in the Proposing Release, and to a similar extent. 
The Commission additionally believes that benefits associated with 
rules applying only to specific asset classes would accrue to market 
participants trading crypto asset securities of the appropriate asset 
type, again in a similar manner and to a similar extent as that 
described in the Proposing Release.
---------------------------------------------------------------------------

    \259\ See id. at 15618-19. See also supra note 181 and 
accompanying text (explaining that the Commission continues to 
assume that, under the Proposed Rules, Newly Designated ATSs will 
choose to register as broker-dealers and comply with the conditions 
of Regulation ATS, rather than register as national securities 
exchanges, and therefore the costs analyzed here assume that such 
systems will not register as national securities exchanges).
---------------------------------------------------------------------------

b. Reduction of Trading Costs and Improvements to Execution Quality
    As discussed fully in the Proposing Release, the Proposed Rules 
would help enhance operational transparency, reduce trading costs, and 
improve execution quality for market participants by requiring public 
disclosure of Form ATS-N and applying the Fair Access Rule to certain 
ATSs.\260\ The Commission believes that benefits associated with these 
rules would accrue to market participants trading crypto asset 
securities of the appropriate asset class, in the same manner and to 
the same extent discussed in the Proposing Release. However, because 
some New Rule 3b-16(a) Systems involve systems which run with an on-
chain component,\261\ and therefore may operate using code that is, at 
least in part, publicly viewable, it is possible that the benefit of 
Form ATS-N disclosures may be reduced for such systems. However, 
because this code is not disclosed in a standardized or human-readable 
form, the Commission believes that this reduction of impact may not be 
significant.
---------------------------------------------------------------------------

    \260\ See id. at 15620-21.
    \261\ For example, the system may be run in part by smart 
contracts deployed on a blockchain. See supra section V.B.1.a for 
additional discussion of such systems.
---------------------------------------------------------------------------

c. Enhancement of Price Discovery and Liquidity
    As discussed fully in the Proposing Release, the Proposed Rules 
would help enhance the price discovery process and liquidity in 
securities markets by applying broker-dealer registration requirements 
of Regulation ATS, Regulation SCI, and the Capacity, Integrity, and 
Security Rule (i.e., Rule 301(b)(6) of Regulation ATS) to certain New 
Rule 3b-16(a) Systems.\262\ The Commission believes that benefits 
associated with these rules would accrue to market participants trading 
crypto asset securities of the appropriate asset class, in the same 
manner and to the same extent discussed in the Proposing Release.
---------------------------------------------------------------------------

    \262\ See id. at 15621-22.
---------------------------------------------------------------------------

d. Electronic Filing Requirements
    As discussed fully in the Proposing Release, the Proposed Rules 
would benefit market participants by improving the usability, 
accessibility, and reliability of the new disclosures, by requiring a 
structured data language and a publicly accessible filing location for 
the applicable required disclosures.\263\ Of these benefits, some are 
associated with rules that apply to all securities, and the rest are 
associated with rules that apply only to securities of specific asset 
classes. The Commission believes that benefits associated with rules 
that apply to all securities would accrue to market participants 
trading crypto asset securities in a manner similar to the description 
in the Proposing Release, and to a similar extent. The Commission 
additionally believes that benefits associated with rules applying only 
to specific asset classes would accrue to market participants trading 
crypto asset securities of the appropriate asset class, again in the 
same manner and to the same extent discussed in the Proposing Release.
---------------------------------------------------------------------------

    \263\ See id. at 15623.
---------------------------------------------------------------------------

    However, because some New Rule 3b-16(a) Systems involve systems 
which run with an on-chain component,\264\ and therefore may operate 
using code that is, at least in part, publicly viewable, it is possible 
that the benefit

[[Page 29476]]

of Form ATS-N disclosures may be reduced for such systems. However, 
because this code is not disclosed in a standardized or human-readable 
form, the Commission believes that this reduction of impact may not be 
significant.
---------------------------------------------------------------------------

    \264\ For example, the system may be run in part by smart 
contracts deployed on a blockchain. See supra section V.B.1.a for 
additional discussion of such systems.
---------------------------------------------------------------------------

2. Costs
    The Commission received comments on the Proposing Release stating 
that the Commission had not considered the costs of the Proposed Rules 
to New Rule 3b-16(a) Systems that trade crypto asset securities.\265\ 
In this section the Commission is supplementing the analysis of costs 
provided in the Proposing Release with additional analysis that details 
the extent and manner in which the costs discussed in the Proposing 
Release would apply to New Rule 3b-16(a) Systems that trade crypto 
asset securities.
---------------------------------------------------------------------------

    \265\ See GDCA Letter II at 6; Crypto Council Letter at 4; 
McHenry/Huizenga Letter at 2; Coinbase Letter at 2; a16z Letter at 
7.
---------------------------------------------------------------------------

    The Commission is relying on the analysis in the Proposing Release 
to form the basis for its discussion of the costs of Proposed Rules for 
systems trading crypto asset securities.\266\ This is because the 
Commission believes that the functioning of New Rule 3b-16(a) Systems 
that trade crypto asset securities are broadly similar to the 
functioning of other New Rule 3b-16(a) Systems discussed in the 
Proposing Release. The Commission preliminarily believes that in some 
cases the costs of compliance may be higher for New Rule 3b-16(a) 
Systems in the market for crypto asset securities than for other New 
Rule 3b-16(a) Systems. This is because in some cases the market for 
crypto asset securities utilizes different technology and methods of 
operation \267\ than is utilized in markets for non-crypto asset 
securities. In addition, throughout the discussion in this Reopening 
Release, the Commission has a greater degree of uncertainty in its 
analysis of the costs that the Proposed Rules would impose on market 
participants than it did in its discussion of costs for non-crypto 
asset securities. This is because the Commission has less data on the 
functioning of the market for crypto asset securities.\268\
---------------------------------------------------------------------------

    \266\ See id.
    \267\ Such different technology may include, for example, smart 
contracts.
    \268\ See supra section V.B.1.
---------------------------------------------------------------------------

    In addition, the Commission has received comments stating that 
entities that trade crypto asset securities may incur different 
compliance costs than entities that trade traditional securities. One 
commenter states that the analysis provided in the Proposing Release 
were based only on ``traditional broker-dealer business,'' adding that 
they were not aware of any broker-dealers that had successfully 
registered under the Commission's framework for registering ``digital-
asset-only broker-dealers.'' \269\ There are also costs that are unique 
to New Rule 3b-16(a) Systems that trade crypto asset securities. These 
costs are also the result of the use of different technology and 
methods of operation in some instances. These costs are discussed in 
the sections below as applicable. The Commission invites comment on the 
costs of the Proposed Rules for market participants in the market for 
crypto asset securities.
---------------------------------------------------------------------------

    \269\ See ADAM Letter II at 14.
---------------------------------------------------------------------------

a. Compliance Costs
    Table V.1 provides estimates for the aggregate compliance costs for 
New Rule 3b-16(a) Systems that trade crypto asset securities. These 
aggregate costs reflect an estimate of 20 additional affected New Rule 
3b-16(a) Systems that were not included in the estimates provided in 
the Proposing Release, which is the upper end of the Commission's 
estimate of the number of affected systems. The Commission is uncertain 
as to how precise these estimates are because we lack sufficient data 
on crypto asset securities.\270\
---------------------------------------------------------------------------

    \270\ See supra section V.B.1.
---------------------------------------------------------------------------

    In both Table V.1 and the following subsections, the Commission is 
relying on the analysis in the Proposing Release to form the basis for 
its discussion of costs. The Commission preliminarily believes that 
actual costs may be higher than these estimates and discussions 
express, due to the type of technology and operations utilized in 
trading crypto asset securities. Because it lacks certain data, the 
Commission is unable to provide an estimate as to how much higher costs 
may be, but preliminarily believes that these estimates and discussions 
provide a useful lower bound.

   Table V.1--Total Implementation Costs and Other Compliance Costs Affecting Entities That Trade Crypto Asset
                                Securities Not Included in the Proposing Release
----------------------------------------------------------------------------------------------------------------
                                                                                     Aggregate       Aggregate
                    Rule                              Compliance action            initial costs   ongoing costs
----------------------------------------------------------------------------------------------------------------
Reg ATS, 301(b)(1).........................  Form BD filing.....................     \a\ $18,000      \d\ $6,000
                                             Form ID filing.....................       \b\ 1,000  ..............
                                             Other compliance costs (non-PRA       \c\ 6,320,000   \e\ 1,154,000
                                              based).
Reg ATS, 301(b)(2).........................  Form ATS filing....................     \f\ 128,000      \g\ 30,000
Reg ATS, 301(b)(9).........................  Form ATS-R filing..................  ..............     \h\ 130,000
Reg ATS, 301(b)(10)........................  Written safeguards and procedures        \i\ 64,000      \j\ 20,000
                                              to protect subscribers'
                                              confidential trading information.
Reg ATS, 302...............................  Recordkeeping......................  ..............      \k\ 68,000
Reg ATS, 303...............................  Record preservation................  ..............       \l\ 2,000
                                                                                 -------------------------------
    Total..................................  ...................................       6,531,000       1,410,000
----------------------------------------------------------------------------------------------------------------
\a\ This cost figure is obtained by summing the initial implementation costs of Rule 301(b)(1)'s Form BD filing
  requirement for 20 New Rule 3b-16(a) Systems that trade crypto asset securities not included in the Proposing
  Release. See Proposing Release at Table VIII.8.
\b\ This cost figure is obtained by summing the initial implementation costs of Rule 301(b)(1)'s Form ID filing
  requirement for 20 New Rule 3b-16(a) Systems that trade crypto asset securities not included in the Proposing
  Release. See Proposing Release at Table VIII.8.
\c\ This cost figure is obtained by summing the other initial implementation costs (non-PRA based) associated
  with Rule 301(b)(1) for 20 New Rule 3b-16(a) Systems that trade crypto asset securities not included in the
  Proposing Release. See Proposing Release at Table VIII.8.
\d\ This cost figure is obtained by summing the ongoing implementation costs of Rule 301(b)(1)'s Form BD filing
  requirement for 20 New Rule 3b-16(a) Systems that trade crypto asset securities not included in the Proposing
  Release. See Proposing Release at Table VIII.8.
\e\ This cost figure is obtained by summing the other ongoing implementation costs (non-PRA based) for 20 New
  Rule 3b-16(a) Systems that trade crypto asset securities not included in the Proposing Release. See Proposing
  Release at Table VIII.8.
\f\ This cost figure is obtained by summing the initial implementation costs of Rule 301(b)(2)'s Form ATS filing
  requirement for 20 New Rule 3b-16(a) Systems that trade crypto asset securities not included in the Proposing
  Release. See Proposing Release at Table VIII.8.

[[Page 29477]]

 
\g\ This cost figure is obtained by summing the ongoing implementation costs of Rule 301(b)(2)'s Form ATS filing
  requirement for 20 New Rule 3b-16(a) Systems that trade crypto asset securities not included in the Proposing
  Release. See Proposing Release at Table VIII.8.
\h\ This cost figure is obtained by summing the ongoing implementation costs of Rule 301(b)(9)'s Form ATS-R
  filing requirement for 20 New Rule 3b-16(a) Systems that trade crypto asset securities not included in the
  Proposing Release. See Proposing Release at Table VIII.8.
\i\ This cost figure is obtained by summing the initial implementation costs of Rule 301(b)(10)'s requirement
  for written safeguards and procedures to protect subscribers' confidential trading information, for 20 New
  Rule 3b-16(a) Systems that trade crypto asset securities not included in the Proposing Release. See Proposing
  Release at Table VIII.8.
\j\ This cost figure is obtained by summing the ongoing implementation costs of Rule 301(b)(10)'s requirement
  for written safeguards and procedures to protect subscribers' confidential trading information, for 20 New
  Rule 3b-16(a) Systems that trade crypto asset securities not included in the Proposing Release. See Proposing
  Release at Table VIII.8.
\k\ This cost figure is obtained by summing the ongoing implementation costs of Rule 302's recordkeeping
  requirement for 20 New Rule 3b-16(a) Systems that trade crypto asset securities not included in the Proposing
  Release. See Proposing Release at Table VIII.8.
\l\ This cost figure is obtained by summing the ongoing implementation costs of Rule 303's record preservation
  requirement for 20 New Rule 3b-16(a) Systems that trade crypto asset securities not included in the Proposing
  Release. See Proposing Release at Table VIII.8.

    Commenters express concern that the Proposed Rules would include 
certain crypto asset security entities that the Commission had not 
considered, which would increase costs beyond what was estimated in the 
Proposing Release due to the increase in the number of affected 
entities.\271\ The Commission is now including a rough estimate that 
the Proposed Rules would include 15-20 New Rule 3b-16(a) Systems that 
trade crypto securities that were not included in the Proposing 
Release,\272\ along with the associated costs.
---------------------------------------------------------------------------

    \271\ See DeFi Education Fund Letter at 9, 17; Crypto Council 
Letter at 5; Blockchain Association Letter II at 7; LeXpunK Letter 
at 11; Chamber Letter at 5.
    \272\ See supra section V.B.1.c (discussing New Rule 3b-16(a) 
Systems in the market for crypto asset securities, and the 
Commission's uncertainty regarding this estimate).
---------------------------------------------------------------------------

    One commenter expresses concern that ``persons who may merely write 
open-source `communications protocol' code or publish information about 
the contents of communications systems which they do not control'' 
would be included by the amended definition of exchange.\273\ Another 
commenter expresses similar concerns that ``DeFi developers'' would be 
included by the amended definition of exchange.\274\ Another commenter 
expresses similar concerns that ``persons who `make available' AMMs or 
interfaces for utilizing AMMs may now be required by the SEC to 
register those AMMs as ATSs or securities exchanges.'' \275\ Another 
commenter expresses concern that the definition of exchange, as 
proposed to be amended, might ``capture developers working with all 
manner of protocols, front end systems, and smart contracts.'' \276\ 
Two commenters include smart contract code developers and publishers, 
blockchain miners and validators, providers of liquidity to AMMs, 
website maintainers, and blockchain client software developers as 
examples of persons they believe might be inadvertently captured by the 
definition of exchange, as proposed to be amended.\277\ Another 
commenter lists social networking websites, peer-to-peer messaging 
applications, business communication platforms, financial information 
systems, blockchain technology nodes, and smart contracting platforms 
as examples of common retail communication platforms that might be 
required to register as an exchange under the Proposed Rules, adding 
that the proposal was likely to make ``everyone involved in any 
securities-related communications an exchange or ATS.'' \278\ Another 
commenter states that ``any broker-dealer or non-broker-dealer that has 
systems related to trading or communicating trading interest in 
securities'' might be included by the Proposed Rules.\279\ This 
commenter also lists validators, developers of smart contracts, and 
website operators as examples of entities that might be included by the 
Proposed Rules.\280\ Another commenter states that the Proposed Rules 
might cause ``developers of code and smart contracts related to a 
Decentralized Protocol, or the maintainers of online websites that 
merely enable access to a Decentralized Protocol'' to be captured by 
the definition of exchange, as proposed to be amended.\281\
---------------------------------------------------------------------------

    \273\ See Delphi Digital Letter at 6.
    \274\ See DeFi Education Fund Letter at 3, 9.
    \275\ See Letter from Murray B. Wells, Attorney/Partner, Wells 
Associates, PLLC, dated Apr. 18, 2022 (``Wells Letter'') at 2.
    \276\ See LeXpunK Letter at 13.
    \277\ See Wells Letter at 2; LeXpunK Letter at 14.
    \278\ See DARLA, GBC, and Global DCA Letter at 7.
    \279\ See a16z Letter at 7.
    \280\ See id. at 14.
    \281\ See Blockchain Association Letter II at 6.
---------------------------------------------------------------------------

    The Commission believes that the entities these commenters describe 
would only be an exchange if they constitute, maintain, or provide a 
market place or facility that meets the applicable criteria, and would 
only incur compliance costs in connection with their activities that 
constitute, maintain, or provide that market place or facility.
    The Commission acknowledges that there may be circumstances in 
which the miners or validators of a blockchain could incur costs under 
the Proposed Rules, and the Commission solicits comment on any such 
costs.\282\
---------------------------------------------------------------------------

    \282\ See supra notes 75-80 and accompanying text, section II.B 
(discussing groups of persons under the definition of exchange); 
infra section V.C.2.c.i.
---------------------------------------------------------------------------

i. Implementation Costs
    New Rule 3b-16(a) Systems that would be newly subject to the 
requirements of Regulation ATS would incur implementation costs 
associated with, among other things, written safeguards and procedures 
to protect subscribers' confidential trading information, 
recordkeeping, record preservation, and Form ATS-R.\283\ The Commission 
estimates that there are 15-20 additional New Rule 3b-16(a) Systems not 
included in the Proposing Release that trade crypto asset 
securities.\284\
---------------------------------------------------------------------------

    \283\ See id. at 15627.
    \284\ See supra section V.B.1.c (discussing New Rule 3b-16(a) 
Systems in the market for crypto asset securities, and the 
Commission's uncertainty regarding this estimate).
---------------------------------------------------------------------------

    Furthermore, New Rule 3b-16(a) Systems that trade NMS stocks would 
incur higher implementation costs due to the heightened requirements of 
filing Form ATS-N compared to New Rule 3b-16(a) Systems that would file 
Form ATS.\285\ To the extent that any crypto asset securities are NMS 
stocks, New Rule 3b-16(a) Systems that trade them would incur these 
higher costs. The Commission estimates that no \286\ New Rule 3b-16(a) 
Systems currently trade crypto asset securities that are NMS stocks.
---------------------------------------------------------------------------

    \285\ See id.
    \286\ The Commission is uncertain as to the accuracy of this 
estimate because we lack sufficient data on the full set of 
securities traded in crypto asset markets. See supra section V.B.1.
---------------------------------------------------------------------------

    Current ATSs and New Rule 3b-16(a) Systems that trade neither NMS 
stocks nor government securities would incur implementation costs 
associated with re-filing or filing the modernized Form ATS. 
Furthermore, all New Rule 3b-16(a) Systems would incur implementation 
costs to file the revised electronic Form ATS-R. Current NMS Stock ATSs 
would incur implementation costs associated with amending revised Form 
ATS-N. The

[[Page 29478]]

Commission estimates that 15-20 \287\ New Rule 3b-16(a) Systems 
currently trade crypto asset securities that are not NMS stocks that 
were not included in the Proposing Release, and no \288\ New Rule 3b-
16(a) Systems currently trade crypto asset securities that are NMS 
stocks. To the extent that a current ATS or New Rule 3b-16(a) System 
trades in crypto asset securities generally or crypto asset NMS stock 
specifically, associated costs described in the Proposing Release would 
be a lower bound on costs incurred.\289\
---------------------------------------------------------------------------

    \287\ See supra section V.B.1.c (discussing New Rule 3b-16(a) 
Systems in the market for crypto asset securities, and the 
Commission's uncertainty regarding this estimate).
    \288\ The Commission is uncertain as to the accuracy of this 
estimate because we lack sufficient data on the full set of 
securities traded in crypto asset markets. See supra section V.B.1.
    \289\ See id.; Table VIII.8.
---------------------------------------------------------------------------

    Significant NMS Stock ATSs and ATSs that trade corporate debt 
securities, municipal securities, or equity securities that are not NMS 
stocks are subject to the Fair Access Rule. The Commission estimates 
that no \290\ New Rule 3b-16(a) Systems that trade crypto asset 
corporate debt securities, municipal securities, NMS stocks, or equity 
securities that are not NMS stocks would be subject to the Fair Access 
Rule.
---------------------------------------------------------------------------

    \290\ The Commission is uncertain as to the accuracy of this 
estimate because we lack sufficient data on the full set of 
securities traded in crypto asset markets. See supra section V.B.1.
---------------------------------------------------------------------------

    Significant ATSs that trade corporate debt securities or municipal 
securities are subject to Rule 301(b)(6). The Commission estimates that 
no \291\ New Rule 3b-16(a) Systems currently trade corporate debt or 
municipal securities that are crypto asset securities and would meet 
the threshold of Rule 301(b)(6). To the extent that such an entity 
exists, the Commission believes that the implementation costs per 
entity presented in the Proposing Release would be a lower bound on 
costs incurred.\292\
---------------------------------------------------------------------------

    \291\ The Commission is uncertain as to the accuracy of this 
estimate because we lack sufficient data on the full set of 
securities traded in crypto asset markets. See supra section V.B.1.
    \292\ See id.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission discussed estimates of 
initial PRA burdens for new SCI entities and ongoing PRA burdens for 
all SCI entities.\293\ To the extent that any significant New Rule 3b-
16(a) System trades in crypto asset securities that are (i) NMS stocks 
or (ii) equity securities that are not NMS stocks, and would therefore 
be subject to Regulation SCI, the Commission preliminarily believes 
that the PRA burdens discussed in the Proposing Release would be a 
lower bound on costs incurred. The Commission estimates that no \294\ 
New Rule 3b-16(a) Systems that trade crypto asset securities that are 
NMS stocks or equity securities that are not NMS stocks would meet the 
applicable thresholds to be subject to Regulation SCI.
---------------------------------------------------------------------------

    \293\ See id.
    \294\ The Commission is uncertain as to the accuracy of this 
estimate because we lack sufficient data on the full set of 
securities traded in crypto asset markets. See supra section V.B.1.
---------------------------------------------------------------------------

    As discussed in the Proposing Release,\295\ the Commission believes 
that the fixed implementation costs associated with Rule 301(b)(9) and 
(10), Rule 302, and Rule 303 would represent a larger fraction of 
revenue for a small (measured in trading volume) ATS relative to that 
for a large ATS. To the extent that New Rule 3b-16(a) Systems trade 
crypto asset securities, and are therefore subject to these costs, the 
Commission expects the fixed costs to fall disproportionately on such 
lower-volume New Rule 3b-16(a) Systems.
---------------------------------------------------------------------------

    \295\ See Proposing Release at 15628.
---------------------------------------------------------------------------

    As discussed in the Proposing Release,\296\ the Commission believes 
that the fixed implementation costs of developing internal processes to 
ensure correct and complete reporting on Form ATS-N would represent a 
larger fraction of revenue for a small (measured in trading volume) ATS 
relative to that for a large ATS. To the extent that New Rule 3b-16(a) 
Systems trade crypto assets that are NMS stocks, and are therefore 
subject to these costs, the Commission expects the fixed costs to fall 
disproportionately on smaller such New Rule 3b-16(a) Systems. However, 
as in the Proposing Release, the Commission expects that smaller New 
Rule 3b-16(a) Systems that are not operated by multi-service broker-
dealer operators and that generally do not engage in other brokerage or 
dealing activities in addition to their ATSs would likely incur lower 
implementation costs, because certain sections of Form ATS-N, as 
proposed to be amended, would not be applicable to these New Rule 3b-
16(a) Systems.
---------------------------------------------------------------------------

    \296\ See id.
---------------------------------------------------------------------------

    The Commission also believes that the implementation costs 
associated with Rule 304 would vary across New Rule 3b-16(a) Systems 
that are NMS Stock ATSs depending on the complexity of the ATS and the 
services that it offers. As discussed in the Proposing Release, the 
Commission believes that less complex ATSs and ATSs that offer fewer 
services would incur lower implementation costs due to requiring fewer 
burden hours to complete their Forms ATS-N.\297\ The Commission 
estimates that no \298\ New Rule 3b-16(a) Systems currently trade 
crypto assets that are NMS stocks. To the extent that any such New Rule 
3b-16(a) System exists, the Commission believes that this would also be 
the case for such systems.
---------------------------------------------------------------------------

    \297\ See id. at 15628.
    \298\ The Commission is uncertain as to the accuracy of this 
estimate because we lack sufficient data on the full set of 
securities traded in crypto asset markets. See supra section V.B.1.
---------------------------------------------------------------------------

ii. Costs Associated With Broker-Dealer Requirements
    Under proposed Rule 301(b)(1), New Rule 3b-16(a) Systems that are 
non-broker-dealers (i.e., non-broker-dealer-operated New Rule 3b-16(a) 
Systems) and trade crypto assets securities would be subject to broker-
dealer registration requirements. Such an entity would incur costs 
associated with broker-dealer registration, which include costs related 
to registering with the Commission as broker-dealers, becoming members 
of an SRO, maintaining broker-dealer registration and SRO membership, 
and certain broker-dealer requirements with respect to maintaining net 
capital, reporting, and recordkeeping. The Commission estimates that 
roughly 15-20 \299\ such New Rule 3b-16(a) Systems that trade crypto 
asset securities not included in the Proposing Release exist. The 
Commission believes that the costs \300\ discussed in the Proposing 
Release \301\ for such entities would be a lower bound on the costs 
incurred.
---------------------------------------------------------------------------

    \299\ See supra section V.B.1.c (discussing New Rule 3b-16(a) 
Systems in the market for crypto asset securities, and the 
Commission's uncertainty regarding this estimate).
    \300\ As stated in the Proposing Release, the Commission lacks 
information that would allow it to provide estimates on certain 
restructuring related costs for a non-broker-dealer-operated 
Communication Protocol System that trades crypto asset securities. 
Likewise, the Commission is unable to estimate the costs of broker-
dealer requirements with respect to maintaining net capital, 
reporting, and recordkeeping, as it lacks information on how 
affected entities might change their current business structures 
upon registering as a broker-dealer.
    \301\ See Proposing Release at 15628-29.
---------------------------------------------------------------------------

    Furthermore, under section 4(a)(4) of the Securities Act,\302\ a 
broker-dealer is required to conduct a reasonable inquiry into the 
facts surrounding the proposed sale of a security by its customer to 
determine whether the sale of the security would violate section 5, 
such as if there is no registration statement in effect with the 
Commission as to the offer and sale of the security, or there is no 
applicable exemption from the registration provisions available to the 
customer. Upon registration as a broker-dealer, an entity could face 
liability under section 5 of the Securities Act for

[[Page 29479]]

facilitating sales of securities on behalf of its customers that would 
violate section 5. To the extent a substantial portion of this entity's 
business is in the sales of such securities, the Proposed Rules would 
result in a significant loss in revenue for the entity.
---------------------------------------------------------------------------

    \302\ See 15 U.S.C. 77d(a)(4).
---------------------------------------------------------------------------

    One commenter states that the Commission's estimates of compliance 
costs, provided in the Proposing Release, omitted the costs of joining 
FINRA, which is a requirement for becoming a registered broker-
dealer.\303\ The commenter characterizes these costs as representing 
``the lion's share'' of the time and effort needed to become a broker-
dealer. The Commission did discuss these costs in the Proposing 
Release,\304\ and believes that the estimates provided there provide a 
useful characterization, notwithstanding the possibility that some 
costs may be higher for entities that trade crypto asset 
securities.\305\
---------------------------------------------------------------------------

    \303\ See Crypto Council Letter at 6.
    \304\ See Proposing Release at Table VIII.8 and note 1120.
    \305\ See supra section V.C.2.a.
---------------------------------------------------------------------------

    The Commission believes that a New Rule 3b-16(a) System not 
operated by a broker-dealer would not incur compliance costs associated 
with registering as a broker-dealer and becoming a member of an SRO 
(e.g., FINRA) if it has a broker-dealer affiliate.\306\ The Commission 
believes that this would also apply to a New Rule 3b-16(a) System that 
trades crypto asset securities. A broker-dealer affiliate that is 
adding ATS or New Rule 3b-16(a) System operations would incur 
additional ongoing costs associated with maintaining FINRA membership 
if adding trading operations increases revenue, the number of 
registered persons or branch offices, trading volume, or expands the 
scope of brokerage activities. Furthermore, a broker-dealer affiliate 
that is adding ATS or New Rule 3b-16(a) System operations could incur 
additional costs associated with maintaining adequate net capital 
level, reporting, and recordkeeping depending on the changes in 
business structure of the broker-dealer. As in the Proposing 
Release,\307\ the Commission is unable to provide estimates on these 
additional costs; however, the Commission estimates that there are no 
\308\ New Rule 3b-16(a) Systems not operated by a broker-dealer that 
are affiliated with an existing broker-dealer.
---------------------------------------------------------------------------

    \306\ See Proposing Release at 15629.
    \307\ See id. at 15629.
    \308\ The Commission is uncertain as to the accuracy of this 
estimate because we lack sufficient data on the full set of 
securities traded in crypto asset markets. See supra section V.B.1.
---------------------------------------------------------------------------

iii. Costs Associated With the Ineffectiveness Declaration
    In addition to the implementation costs associated with filing and 
amending Form ATS-N, the Commission preliminarily believes that the 
proposed ability for the Commission to declare an initial Form ATS-N or 
Form ATS-N amendment ineffective could result in direct costs for New 
Rule 3b-16(a) Systems that are NMS Stock ATSs.\309\ However, the 
Commission estimates that no \310\ New Rule 3b-16(a) Systems currently 
trade crypto asset securities that are NMS stocks. To the extent that 
such a New Rule 3b-16(a) System exists, it would incur these costs. 
However, the Commission believes that there would not be a substantial 
burden imposed in connection with resubmitting an initial Form ATS-N or 
a Form ATS-N amendment or from an ineffective declaration in 
general.\311\ The costs of an ineffectiveness declaration would 
encourage New Rule 3b-16(a) Systems trading in these crypto asset 
securities to initially submit a more accurate and complete Form ATS-N 
and amendments thereto, which would reduce the likelihood that they are 
declared ineffective.\312\ Additionally, New Rule 3b-16(a) Systems that 
trade NMS stocks, including those that are crypto asset securities, 
would also be able to continue operations pending the Commission's 
review of their initial Form ATS-N. However, if after notice and 
opportunity for hearing, the Commission declares an initial Form ATS-N 
filed by such a New Rule 3b-16(a) System ineffective, the ATS would be 
required to cease operations until an initial Form ATS-N is effective.
---------------------------------------------------------------------------

    \309\ See id.
    \310\ The Commission is uncertain as to the accuracy of this 
estimate because we lack sufficient data on the full set of 
securities traded in crypto asset markets. See supra section V.B.1.
    \311\ See Proposing Release at 15630 (citation omitted).
    \312\ See id.
---------------------------------------------------------------------------

iv. Costs Associated With the Fair Access Rule
    The Commission preliminarily believes that complying with the Fair 
Access Rule could result in compliance costs (non-PRA based) for New 
Rule 3b-16(a) Systems that trade NMS stocks (including NMS Stock ATSs 
that would no longer be excluded from Fair Access compliance under Rule 
301(b)(5)(iii) as proposed),\313\ equity securities that are not NMS 
stocks, corporate debt securities, or municipal securities.\314\ If a 
New Rule 3b-16(a) System must change fee structures, order interaction 
procedures, trading protocols, or access provisions and adapt their 
operating model due to the Fair Access Rule, it would incur costs 
related to changing business operations.\315\ To the extent that a New 
Rule 3b-16(a) System trades in crypto asset securities that fall into 
any of the above-mentioned categories, the Commission believes that it 
would incur costs related to these changes as described in the 
Proposing Release. As in the Proposing Release, the Commission lacks 
data that would be used to quantify the costs related to these changes. 
The Commission estimates that no \316\ New Rule 3b-16(a) Systems 
currently trade crypto asset securities that are NMS stocks, equities 
that are not NMS Stocks, corporate debt, or municipal securities.
---------------------------------------------------------------------------

    \313\ Today, based on public Form ATS-N filings, no NMS Stock 
ATS operates pursuant to this exclusion.
    \314\ See id.
    \315\ See id.
    \316\ The Commission is uncertain as to the accuracy of this 
estimate because we lack sufficient data on the full set of 
securities traded in crypto asset markets. See supra section V.B.1.
---------------------------------------------------------------------------

    As discussed in the Proposing Release,\317\ the Proposed Rules 
would aggregate volume across affiliated ATSs in calculating the fair 
access volume thresholds. This would mean affiliate ATSs that otherwise 
do not meet the relevant volume thresholds may be subject to the Fair 
Access Rule. As discussed above, if ATSs must adapt their operating 
models as a result of being subject to the Fair Access Rule, those ATSs 
would incur costs related to changing business operations. The 
Commission estimates that no current affiliate ATS that trades NMS 
stocks, equity securities that are not NMS stocks, corporate debt 
securities, or municipal securities, that are crypto asset securities, 
and does not already currently meet the fair access volume thresholds 
would meet the thresholds if volume is aggregated across affiliated 
ATSs.
---------------------------------------------------------------------------

    \317\ See Proposing Release at 15630-31.
---------------------------------------------------------------------------

v. Costs Associated With Rule 301(b)(6)
    As discussed in the Proposing Release,\318\ in addition to the 
implementation costs associated with reporting outages and 
recordkeeping under the proposed Rule 301(b)(6), the Commission 
preliminarily believes that significant New Rule 3b-16(a) Systems that 
trade corporate debt securities or municipal securities could incur 
compliance costs (non-PRA based) to ensure adequate capacity, 
integrity, and security with respect to those systems

[[Page 29480]]

that support order entry, order routing, order execution, transaction 
reporting, and trade comparison. To the extent that a New Rule 3b-16(a) 
System trades in crypto assets that are corporate debt securities or 
municipal securities, and does not currently meet the standards under 
the proposed rule, they would incur compliance costs as described in 
the Proposing Release. The Commission lacks information that would 
enable it to reasonably estimate these costs, but believes that the 
compliance costs associated with Rule 301(b)(6) would be significantly 
less than those of Regulation SCI.\319\ Furthermore, the Commission 
estimates that none \320\ of the New Rule 3b-16(a) Systems trading 
crypto asset securities would meet the applicable volume requirements 
and be subject to the requirements of Rule 301(b)(6).
---------------------------------------------------------------------------

    \318\ See id. at 15631.
    \319\ See id. at 15631 n.1138 and accompanying text.
    \320\ The Commission is uncertain as to the accuracy of this 
estimate because we lack sufficient data on the full set of 
securities traded in crypto asset markets. See supra section V.B.1.
---------------------------------------------------------------------------

vi. Costs Associated With Regulation SCI
    New Rule 3b-16(a) Systems that meet certain volume thresholds and 
trade crypto asset securities that are (i) NMS stock or (ii) equity 
securities that are not NMS stocks, would incur compliance costs (non-
PRA based costs) as SCI entities, including both initial and ongoing 
costs. The Commission believes that, to the extent that there exist New 
Rule 3b-16(a) Systems trading crypto asset securities that are equity 
securities, including NMS stocks, the costs described in the Proposing 
Release \321\ would be a lower bound on cost incurred. The Commission 
estimates no \322\ New Rule 3b-16(a) Systems that trade crypto asset 
securities would be subject to Regulation SCI.
---------------------------------------------------------------------------

    \321\ See id.; section VIII.C.2.a.vi.
    \322\ The Commission is uncertain as to the accuracy of this 
estimate because we lack sufficient data on the full set of 
securities traded in crypto asset markets. See supra section V.B.1. 
See also Securities Exchange Act Release No. 97143 (Mar. 15, 2023), 
available at https://www.sec.gov/rules/proposed/2023/34-97143.pdf. 
The Commission encourages commenters to review that Regulation SCI 
proposal to determine whether it might affect their comments on this 
Reopening Release.
---------------------------------------------------------------------------

    The Commission also believes that some New Rule 3b-16(a) Systems' 
participants required to participate in the testing of business 
continuity and disaster recovery plans would incur Regulation SCI-
related connectivity costs. The Commission believes that $10,000 apiece 
would be a lower bound on such costs.\323\ However, because the 
Commission estimates that no New Rule 3b-16(a) Systems that trade 
crypto asset securities would be subject to Regulation SCI, no such 
participants would incur these costs.
---------------------------------------------------------------------------

    \323\ See id.
---------------------------------------------------------------------------

    The Commission believes that the costs to comply with Regulation 
SCI discussed above would also fall on third-party vendors employed by 
New Rule 3b-16(a) Systems to provide services used in their SCI 
systems.\324\ To the extent that a vendor provides services to an ATS 
that trades crypto asset securities that are equity securities, 
including NMS stocks, it would incur these costs. However, because the 
Commission estimates that no New Rule 3b-16(a) Systems that trade 
crypto asset securities would be subject to Regulation SCI, no such 
vendors would incur these costs.
---------------------------------------------------------------------------

    \324\ See id. at 15632.
---------------------------------------------------------------------------

b. Indirect Costs
    The Commission believes that the Proposed Rules could result in 
indirect costs for market participants and certain New Rule 3b-16(a) 
Systems that trade crypto asset securities.\325\
---------------------------------------------------------------------------

    \325\ See infra section V.C.3 for discussions about the economic 
effects of the Proposed Rules specifically pertaining to 
competition, efficiency, and capital formation.
---------------------------------------------------------------------------

i. General Indirect Costs
    In the following discussion, the Commission is relying on the 
analysis in the Proposing Release to form the basis for our discussion 
of these costs. The Commission preliminarily believes that actual costs 
may be higher than these discussions express, due to the technology and 
operations utilized in trading crypto asset securities. The Commission 
is unable to provide a discussion as to how much higher costs may be, 
but preliminarily believes that the discussions below provide a useful 
lower bound.
    The public disclosure requirements of Form ATS-N under the proposal 
could generate indirect costs for some subscribers by causing New Rule 
3b-16(a) Systems that trade NMS stock to stop sharing information that 
they might currently offer to only some subscribers.\326\ Form ATS-N 
would require NMS Stock ATSs to publicly disclose any platform-wide 
order execution metrics that they share with any subscriber. To avoid 
publicly disclosing this information, an ATS might stop sharing the 
information with subscribers. The trading costs of subscribers that 
currently use this information to help make trading decisions would 
likely increase if the information is no longer available to them. To 
the extent that a subscriber trades using a New Rule 3b-16(a) System 
that trades crypto assets that are NMS stocks and receives such 
information, the subscriber would incur these indirect costs. As 
discussed in the Proposing Release, the Commission anticipates that 
this risk might be low due to commercial incentives that may induce 
ATSs to continue disclosing this information.\327\
---------------------------------------------------------------------------

    \326\ See id.
    \327\ See id.
---------------------------------------------------------------------------

    The Commission believes that the public disclosure of Form ATS-N 
would generate indirect costs, in the form of transfers, for some 
subscribers of New Rule 3b-16(a) Systems that trade NMS stock who might 
currently have more information regarding some ATS features, such as 
order priority and matching procedures, than other subscribers.\328\ 
The public disclosure of these features would reduce informed 
subscribers' information advantage over other subscribers on such New 
Rule 3b-16(a) Systems and increase their trading costs. In this regard, 
the Commission recognizes that this effect would be a transfer to those 
subscribers who would receive the proposed information, from those 
subscribers who currently exclusively receive such information. To the 
extent that a New Rule 3b-16(a) System trades in crypto asset 
securities that are NMS stocks, such transfers might occur among their 
subscribers.
---------------------------------------------------------------------------

    \328\ See id.
---------------------------------------------------------------------------

    Some New Rule 3b-16(a) Systems that trade NMS stock would 
experience indirect costs from the public disclosure of Form ATS-N to 
the extent that this form would reveal information to competitors.\329\ 
If such a New Rule 3b-16(a) System in part relies on certain 
operational characteristics (e.g., order types, trading 
functionalities) to attract customer order flow and generate trading 
revenues, it is possible that the public disclosure of these 
characteristics in Form ATS-N would make it easier for other trading 
venues to adopt the operational characteristics, which would lower 
trading volume and reduce revenue of the disclosing New Rule 3b-16(a) 
System. Such costs to the disclosing entity would constitute transfers 
to competing ATSs rather than a net cost to the market. To the extent 
that a New Rule 3b-16(a) System trades any crypto assets that are NMS 
stocks, it might experience these transfers described in the Proposing 
Release. Furthermore, because some New Rule 3b-16(a) Systems involve 
systems which run with an on-chain

[[Page 29481]]

component,\330\ and therefore may operate using code that is, at least 
in part, publicly viewable, it is possible that the adverse impact of 
these disclosures may be reduced, for such systems. However, because 
this code is not disclosed in a standardized or human-readable form, 
the Commission believes that this reduction of impact may not be 
significant.
---------------------------------------------------------------------------

    \329\ See id.
    \330\ For example, the system may be run in part by smart 
contracts deployed on a blockchain. See supra section V.B.1.a for 
additional discussion of such systems.
---------------------------------------------------------------------------

    The Commission believes that the risk of these transfers is low 
because it is not likely the responsive information to Form ATS-N, as 
proposed to be amended, would include detailed enough information 
regarding operational facets such that the public disclosure of the 
information would allow another ATS to replicate the functionality to 
the extent it would adversely affect the competitive position of the 
disclosing ATS in the market.\331\
---------------------------------------------------------------------------

    \331\ See id.
---------------------------------------------------------------------------

    The Commission believes that New Rule 3b-16(a) Systems that trade 
NMS stocks (including NMS Stock ATSs that would no longer be excluded 
from Fair Access compliance under Rule 301(b)(5)(iii) as proposed), 
equity securities that are not NMS stocks, corporate debt securities, 
or municipal securities could indirectly experience costs in the form 
of lost revenue if they meet or exceed the Fair Access Rule thresholds 
and need to alter their business model to comply with the requirements 
of the Fair Access Rule.\332\ To the extent that any crypto asset 
securities fall into these categories, the Commission believes that a 
New Rule 3b-16(a) System that trades in them, including NMS Stock ATSs 
that trade crypto asset securities that are NMS stocks and would no 
longer be excluded from Fair Access compliance under Rule 
301(b)(5)(iii) as proposed, might incur these costs discussed in the 
Proposing Release.
---------------------------------------------------------------------------

    \332\ See id.
---------------------------------------------------------------------------

    As discussed in the Proposing Release,\333\ the Commission believes 
that market participants could incur indirect costs related to New Rule 
3b-16(a) Systems that trade NMS stocks (including NMS Stock ATSs that 
would no longer be excluded from Fair Access compliance under Rule 
301(b)(5)(iii) as proposed), equity securities that are not NMS stocks, 
corporate debt securities, or municipal securities, being subject to 
the Fair Access Rule. To the extent that a New Rule 3b-16(a) System 
(including NMS Stock ATSs that would no longer be excluded from Fair 
Access compliance under Rule 301(b)(5)(iii) as proposed) trades in 
crypto assets that fall into any of the above categories of security, 
market participants that trade on such platforms might experience 
transfer costs through the same chain of events described in the 
Proposing Release.
---------------------------------------------------------------------------

    \333\ See Proposing Release at 15633.
---------------------------------------------------------------------------

    Compared to larger and more established New Rule 3b-16(a) Systems 
trading in crypto assets, it is possible that younger New Rule 3b-16(a) 
Systems rely more on providing catered services, including more 
advantageous access, to specific clients or a clientele, in order to 
grow their businesses.\334\ If being subject to the Fair Access Rule 
prohibits these New Rule 3b-16(a) Systems from doing this, these New 
Rule 3b-16(a) Systems could restrict trading on their systems when they 
are close to meeting the volume thresholds under the Fair Access 
Rule.\335\ As in the Proposing Release, to the extent that the market 
for trading services is competitive, the Commission believes this may 
not result in a significant increase in trading costs for market 
participants, because the order flow that was being sent to those New 
Rule 3b-16(a) Systems would likely be absorbed and redistributed 
amongst other New Rule 3b-16(a) Systems or other venues.\336\ However, 
if a New Rule 3b-16(a) System that is the sole provider of a niche 
service limits the trading in certain securities to avoid being subject 
to the Fair Access Rule, it could be more difficult for some market 
participants to find an alternative trading venue for that niche 
service, which would result in a larger increase in trading costs.\337\ 
To the extent that a New Rule 3b-16(a) System trades in crypto assets 
that are securities, the Commission expects these costs to apply to 
such a New Rule 3b-16(a) System as described in the Proposing Release.
---------------------------------------------------------------------------

    \334\ Id.
    \335\ Id.
    \336\ Id.
    \337\ Id.
---------------------------------------------------------------------------

    As discussed in the Proposing Release,\338\ the Proposed Rules 
apply certain aggregate volume thresholds to the Fair Access Rule in 
the markets for corporate debt and municipal securities and equity 
securities, which could also cause market participants to incur similar 
indirect costs. If the aggregate volume of ATSs operated by a common 
broker-dealer or operated by affiliated broker-dealers approaches the 
Fair Access volume thresholds, then the operators could restrict 
trading in one or more securities on their systems in order to avoid 
being subject to the requirements of the Fair Access Rule.\339\ Market 
participants could also incur indirect costs from the Proposed Rules to 
apply certain aggregate volume thresholds to the Fair Access Rule if it 
causes a broker-dealer or affiliated broker-dealers that operate 
multiple ATSs to shut down one or more of their smaller ATSs in order 
to avoid triggering the Fair Access threshold.\340\ This could cause 
market participants that subscribed to one of the shutdown platforms to 
incur search costs to find another venue to trade on.\341\ To the 
extent that there exist crypto assets that fall into one of the above 
asset classes, and are traded on ATSs, the Commission believes that 
these indirect costs could apply as discussed in the Proposing Release.
---------------------------------------------------------------------------

    \338\ Id.
    \339\ Id.
    \340\ Id.
    \341\ Id.
---------------------------------------------------------------------------

    As discussed in the Proposing Release,\342\ the Commission believes 
that market participants could incur indirect costs related to applying 
Regulation SCI to New Rule 3b-16(a) Systems in the market for crypto 
asset equity securities and applying Rule 301(b)(6) to New Rule 3b-
16(a) Systems in the market for crypto asset corporate debt securities 
or municipal securities. If such a New Rule 3b-16(a) System is close to 
satisfying the volume thresholds of Regulation SCI or Rule 301(b)(6), 
it could limit the trading in certain securities on its systems to stay 
below the volume thresholds in order to avoid being subject to 
Regulation SCI or Rule 301(b)(6).\343\ As discussed above, the 
Commission believes that in general this would not necessarily lead to 
higher trading costs, but to the extent this occurs for a New Rule 3b-
16(a) System that is the sole provider of a niche service, some market 
participants would incur higher trading costs.
---------------------------------------------------------------------------

    \342\ Id.
    \343\ Id.
---------------------------------------------------------------------------

    Additionally, in order to stay below the volume thresholds under 
Regulation SCI or Rule 301(b)(6), a New Rule 3b-16(a) System could 
break itself up into smaller New Rule 3b-16(a) Systems.\344\ If this 
results in its subscribers changing their administrative and 
operational procedures (e.g., means of access, connectivity, order 
entry), the subscribers would incur costs associated with making those 
administrative and operational changes to utilize the ATS(s), or 
otherwise incur search costs to find another venue to trade.\345\ To 
the extent that there exist crypto assets that fall into one of the 
applicable asset

[[Page 29482]]

classes, and are traded on New Rule 3b-16(a) Systems, the Commission 
believes that these costs could apply as discussed in the Proposing 
Release.\346\
---------------------------------------------------------------------------

    \344\ Id.
    \345\ Id.
    \346\ See id.
---------------------------------------------------------------------------

ii. Costs Associated With the Proposed Functional-Test-Based Exchange 
Definition
    The proposed functional-test-based exchange definition could result 
in increased legal costs for market participants. Specifically, the 
Proposed Rules could cause market participants to engage in a more 
thorough and expansive compliance review of any changes in operations 
out of concern that a large range of activities might meet the proposed 
definition of exchange. This approach could also increase uncertainty 
about the application of the Proposed Rules, which in turn may further 
increase legal costs.
    In addition, market participants would decrease and slow down the 
development of new products and technologies. Such development may 
depend on the ability to rapidly develop and deploy new systems. The 
need for more extensive compliance review, uncertainty about the 
application of the Proposed Rules,\347\ and concerns that new systems 
may inadvertently meet the definition of exchange \348\ could make such 
a process more difficult. Market participants may come to regard some 
areas of new product development as inherently risky, because of the 
potential for regulatory costs, and decide to stop engaging in them.
---------------------------------------------------------------------------

    \347\ One commenter agrees with assessment. See DARLA, GBC, and 
Global DCA Letter at 6 (stating that the broad language in the 
Proposed Rules ``. . . would likely cause chilling effects and deter 
further innovation and activity among early-stage technology 
companies due to uncertainty over which technology services would 
satisfy the new and expanded definition of exchange.'')
    \348\ One commenter expresses such concerns, stating ``[w]e have 
significant concern that a lack of a specific definition for such a 
broadly explained term will cause ongoing confusion and, as a 
result, increase the potential for a market participant to 
inadvertently run afoul of the obligations set forth in the 
Proposals.'' See Chamber Letter at 4.
---------------------------------------------------------------------------

    One commenter states that the uncertainty caused by the expanded 
definition of exchange in the Proposed Rules ``. . . is concerning and 
likely to stifle innovation.'' \349\ Another commenter states that the 
uncertainty of exposure to enforcement actions might stifle 
innovation.\350\ While the Commission does not believe that innovation 
will be impossible under the Proposed Rules, we acknowledge that there 
could be less innovation as a result of the uncertainty and compliance 
costs associated with the broad formulation of the Proposed Rules.
---------------------------------------------------------------------------

    \349\ See McHenry/Huizenga Letter at 2.
    \350\ See LexPunK Letter at 2.
---------------------------------------------------------------------------

iii. Costs Associated With Discontinuation of Non-Security-for-Security 
Pairs Trading
    Many crypto asset securities are not traded in exchange for fiat 
currencies but are instead traded for other crypto assets. To the 
extent that a New Rule 3b-16(a) System enables the trading of crypto 
asset securities for crypto assets that are not securities, that entity 
may also incur the cost of having to stop enabling such trades, and the 
resulting loss of revenue. Because pairs trading is common in crypto 
asset markets, this cost may be significant for some New Rule 3b-16(a) 
Systems. These costs may be mitigated if affected New Rule 3b-16(a) 
Systems are able to arrange for a fiat currency market for the relevant 
crypto asset security, and a separate fiat currency market in a 
separate entity for the non-security crypto asset, so that it can 
arrange for a pair of trades to take place that closely replicates the 
desired trade. For systems that wish to complete the transaction 
entirely on-chain, such arrangements are likely to be impossible, and 
this mitigation would therefore not apply to them.
    Furthermore, because existing national securities exchanges and 
ATSs currently do not facilitate trading between crypto asset 
securities and non-security crypto assets, the loss of New Rule 3b-
16(a) Systems as platforms for engaging in such trades may be a 
significant cost for market participants in crypto asset markets. The 
inability to complete such trades using New Rule 3b-16(a) Systems could 
require market participants to switch to other means of trading, such 
as bilateral voice trading. To the extent such trading methods are not 
the market participant's preferred method, this would increase trading 
costs. Market participants may be able to mitigate these costs if New 
Rule 3b-16(a) Systems are able to provide cash markets for the relevant 
crypto assets, and arrange for a pair of trades that would closely 
replicate the desired exchange.
c. Costs for Platforms Using Certain Technologies
    The Commission preliminarily believes that there may be costs 
associated with complying with the Proposed Rules for New Rule 3b-16(a) 
Systems that would perform exchange activities using certain 
technologies that are used in the market for crypto asset trading 
services.\351\ The Commission is unable to provide an exact estimate or 
quantitative range for these compliance costs, because the Commission 
lacks sufficient detail about the variety of platforms whose systems 
use these technologies, or their options to comply. In the following 
subsections the Commission provides a range of compliance costs related 
to responsibilities for compliance, as well as a discussion of the 
factors associated with certain technologies that might increase the 
compliance costs of certain specific requirements. It is possible that 
operating a system that uses these technologies to perform exchange 
activities under the Proposed Rules in a manner that complies with 
applicable regulations could significantly reduce the extent to which 
the system is ``decentralized'' or otherwise operates in a manner 
consistent with the principles that the crypto asset industry commonly 
refer to as ``DeFi.''
---------------------------------------------------------------------------

    \351\ One commenter on the Proposing Release states that due to 
the ``decentralized and autonomous nature of Decentralized 
Protocols, and the lack of an intermediary who could serve as a 
broker-dealer affiliate,'' the Proposed Rules would impose 
significant burdens that had not been considered. See Blockchain 
Association Letter II at 8. The Commission believes that the general 
costs described throughout section V.C.2 as applicable, and the 
specific costs discussed in this subsection, provide the necessary 
consideration of such burdens.
---------------------------------------------------------------------------

i. Initial Costs of Compliance
    The Commission preliminarily believes that some New Rule 3b-16(a) 
Systems that trade crypto asset securities may incur greater initial 
costs to come into compliance, due to these systems' use of certain 
technologies that, for example, allow them to automate portions of 
their operations using smart contracts deployed on an underlying 
blockchain.\352\ The Commission believes that there are a range of such 
technologies, or a range of systems' use of such technologies, that 
would entail differing initial costs, and has prepared a description of 
two scenarios that we preliminarily believe covers the range of costs 
likely to occur.\353\ These scenarios consist of an example of a system 
that would likely have the lowest possible costs of compliance for a 
system using such technologies, and an example of a hypothetical system 
in which the cost of compliance is likely to be the highest possible. 
The Commission preliminarily believes that the initial compliance costs 
of the typical New Rule 3b-16(a) System that performs exchange

[[Page 29483]]

activities using such technologies would fall in between the costs 
associated with these two examples. The Commission requests comment on 
the issue of compliance costs of New Rule 3b-16(a) Systems that operate 
in this manner.
---------------------------------------------------------------------------

    \352\ These technologies include, but are not limited to, system 
architectures that permit RFQ systems to be run partly or wholly on-
chain using smart contracts.
    \353\ Providing an estimate corresponding to every 
hypothetically possible design of systems using such technologies 
would be impractical.
---------------------------------------------------------------------------

    At the low end of the range, the Commission preliminarily believes 
a New Rule 3b-16(a) System that performs exchange activities using 
these technologies may incur similar costs to those of a New Rule 3b-
16(a) System that does not use such technologies.\354\ This lower bound 
is based on consideration of a hypothetical system using such 
technologies in a way that the Commission believes would tend to 
present the least difficulty in complying with the Proposed Rules. This 
low-cost hypothetical case consists of a New Rule 3b-16(a) System that 
would automate a portion of its operations using a set of smart 
contracts \355\ that it developed and deployed itself; would have the 
sole right and means \356\ to make alterations to the deployed smart 
contracts; would receive any fees charged by the smart contracts, as 
well as any fees collected in connection to the service through other 
means; and would maintain all off-chain operations that might be 
necessary to run the service.
---------------------------------------------------------------------------

    \354\ See supra section V.C.2.a and V.C.2.b covering these 
costs.
    \355\ See supra section V.B.1.a discussing smart contracts for 
DeFi platforms and their management.
    \356\ Possession of the sole means to make alterations to a 
smart contract could consist of a design in which changes may be 
made to the smart contract's code by using a unique private key, and 
where that key is in the sole possession of the firm.
---------------------------------------------------------------------------

    In this case, the Commission believes the responsibility to bring 
such a New Rule 3b-16(a) System into compliance may fall to this firm 
and that under such circumstances, the cost of compliance would be 
similar to that of a New Rule 3b-16(a) System that does not automate 
any portion of its operations using a smart contract, as detailed in 
sections V.C.2.a and V.C.2.b above. In particular, any alterations that 
may need to be made to the smart contracts connected with the system in 
order to bring it into compliance with the relevant regulations could 
be implemented in a manner similar to alterations made to software 
generally, due to the firm's control over those smart contracts.
    The Commission preliminarily believes that a New Rule 3b-16(a) 
System that performs its exchange activities in part using smart 
contracts, but that is not set up in the manner described above, may 
have significantly higher costs of compliance than the lower bound. The 
Commission is unable to provide a quantitative estimate of an upper 
bound because the Commission lacks information on the costs of the 
activities which may be necessary for more complex systems using such 
technology to come into compliance.\357\ The Commission preliminarily 
believes that a reasonable case, in which the highest possible 
compliance costs would result, would be a New Rule 3b-16(a) System that 
performs exchange activities in part using smart contracts, but in 
which control over changes to the smart contracts is given to a token-
based voting mechanism, which may use governance tokens as discussed 
above,\358\ and where the tokens are dispersed among a large number 
\359\ of investors.
---------------------------------------------------------------------------

    \357\ In particular, the Commission does not have examples of 
systems using such technology that are registered with the 
Commission as an exchange or as an ATS. See supra section V.B.2.
    \358\ See supra note 15.
    \359\ ``Large'' could mean millions of retail investors, each 
with some share in the vote determined by the number of tokens they 
hold. One prominent DeFi platform has approximately 755 million 
outstanding tokens, each with a share in governance votes. See Curve 
DAO, CoinGecko, available at https://www.coingecko.com/en/coins/curve-dao-token. The Commission understands that, while protocols 
may have a large number of outstanding governance tokens, control of 
those tokens (or their voting rights) may be held by a limited 
number of entities.
---------------------------------------------------------------------------

    In this scenario, the Commission believes that the holders of the 
governance tokens, or other tokens that carry voting rights, may bear 
the responsibility of ensuring the compliance of the system. In such a 
scenario, the Commission believes that the holders of the relevant 
tokens could choose to form an organization or association, or to 
designate a member of a group of persons, which would be responsible 
for undertaking the activities necessary to bring the New Rule 3b-16(a) 
System into compliance with Regulation ATS.
    The costs to produce such an organization or association, or to 
designate a member of a group of persons may involve the effort 
required on the part of the relevant token holders to coordinate and 
reach agreement on the design of such an organization,\360\ legal 
expenses associated with the design and legal registration of the 
entity, or costs involved with designating a member of the group of 
persons responsible for ensuring compliance. If the relevant tokens of 
a smart contract entitle their holders to a share of transaction fees 
paid to the smart contract, or some other form of return, these 
expenses could be paid using such returns; otherwise, the holders of 
the tokens themselves may have to supply the necessary funds.
---------------------------------------------------------------------------

    \360\ The Commission believes that this may be a difficult 
undertaking, given the potentially large number of individuals and 
entities that would have to reach agreement. Such entities may also 
lack the sophistication or resources required to easily navigate the 
process of forming such an organization or association and coming 
into compliance.
---------------------------------------------------------------------------

    Also, because changes to the smart contracts would require a vote, 
the Commission preliminarily believes that the process of implementing 
any changes to the smart contracts that are required for compliance may 
be more costly than in the case where a single firm holds all control.
    It is possible that, when it becomes necessary for the holders of 
relevant tokens to form an organization or association, or to designate 
a member of a group of persons, some of those holders might choose to 
sell their tokens to avoid taking on regulatory burdens, which the 
Commission expects would ultimately result in there being fewer holders 
of the governance tokens. The Commission does not have the data it 
would need to estimate the extent to which this would happen, but to 
the extent that this process significantly reduces the number of 
holders of a smart contract's governance tokens, the Commission expects 
that the costs of compliance for such a smart contract would fall 
between the two extremes already discussed.
    The Commission believes that there is a third configuration of 
smart contract management which may have costs either inside the range 
described above or outside this range. This is the configuration 
entailed by a New Rule 3b-16(a) System that would automate all of its 
operations via smart contracts that are immutable. This immutability 
makes it impossible to alter the code of a smart contract using the 
typical processes of a public blockchain once it has been deployed, 
even by the entity responsible for its deployment and responsible for 
bringing such a system into compliance. However, the Commission 
understands that it is possible for the miners or validators of a smart 
contract's underlying blockchain to effect a change to a blockchain 
through, for example, a fork that would impact interactions with the 
immutable smart contract, and that this capacity has already been used 
on rare occasions.\361\
---------------------------------------------------------------------------

    \361\ See, e.g., https://spectrum.ieee.org/ethereum-blockchain-forks-to-return-stolen-funds, discussing how miners of a major 
public blockchain ``forked'' the chain to change an undesired 
result.
---------------------------------------------------------------------------

    In this case, the costs would depend on the specific factual 
circumstances, including, among other considerations, the activities 
performed by persons that, for example, could fund or code changes to 
the blockchain, or validate or mine

[[Page 29484]]

the transactions, or some combination thereof.\362\ It is possible that 
in this case costs may exceed the upper bound described above.\363\ The 
Commission is uncertain as to the exact size of the costs that may be 
involved and requests comment on the issue.
---------------------------------------------------------------------------

    \362\ See supra notes 75-80 and accompanying text.
    \363\ The Commission preliminarily believes that costs may be 
higher for reasons that might include technical difficulties that 
would not be encountered when bringing a Rule 3b-16(a) System based 
on a mutable smart contract into compliance.
---------------------------------------------------------------------------

    In addition, the Commission preliminarily believes that in a 
circumstance in which only validators or miners are able to stop 
effectuating transactions that trigger the automated operations of a 
smart contract, the validators or miners may discontinue processing 
transactions resulting from trading interest matched by the New Rule 
3b-16(a) System. In the event that validators or miners choose to 
discontinue processing such transactions, there may be costs to market 
participants associated with arranging to direct their trading interest 
to other venues. If instead miners or validators incur costs by 
choosing to continue processing transactions of such a system, the 
Commission preliminarily believes that they may pass on some of these 
costs to users, as described above.\364\ It may also be the case that 
even if the miners or validators as a whole opt to effect a change to a 
blockchain or smart contracts, some miners or validators could choose 
to cease processing transactions of a blockchain.
---------------------------------------------------------------------------

    \364\ See supra section V.C.2.a.
---------------------------------------------------------------------------

    The Commission is not aware of a specific example of a New Rule 3b-
16(a) System which automates all of its operations by means of 
immutable smart contracts. However, the Commission has limited 
information on such systems and requests comment on this issue.
    One commenter describes ``practical considerations'' that it 
believes might mean that it was ``not possible'' for certain systems, 
which they term ``Decentralized Exchanges'' or ``DEXes,'' to comply 
with the Proposed Rules.\365\ These considerations include the fact 
that, once launched, smart contracts ``are not controlled or 
intermediated by any person or group of persons,'' \366\ and in 
particular, that responsibility for the system could not be attributed 
to the persons who created or deployed the smart contract because 
``once deployed, the DEX typically cannot be significantly altered or 
controlled by any such persons.'' \367\
---------------------------------------------------------------------------

    \365\ See Coinbase Letter at 7.
    \366\ See id. at 6.
    \367\ Id.
---------------------------------------------------------------------------

    The Commission preliminarily believes that our analysis adequately 
addresses these concerns. Specifically, smart contracts can be 
controlled after deployment, however, in some instances, the functions 
of miners or validators may be needed to exert such control. The 
discussion above provides a range of possible scenarios that have 
different possible costs and may result in different entities being 
affected, but the Commission believes that these costs are not 
impossible to pay.\368\
---------------------------------------------------------------------------

    \368\ As discussed above, these costs may be high enough that 
the group of persons responsible for the exchange choose to exit the 
market for crypto asset security trading services rather than 
continue operations. See infra section V.C.3.a (discussing entry and 
exit as result of compliance costs).
---------------------------------------------------------------------------

    Another commenter states that the compliance burdens imposed by the 
Proposed Rules ``may simply be insurmountable due to the 
incompatibility of the decentralized nature of Decentralized Protocols 
with the requirement for a centralized, regulated intermediary imposed 
by the `exchange' definition.'' \369\ This commenter also states that 
``it is unclear how [persons related to Decentralized Protocols] could 
achieve compliance with the relevant regulations.''
---------------------------------------------------------------------------

    \369\ See Blockchain Association Letter II at 8.
---------------------------------------------------------------------------

    The Commission acknowledges that, in the case of New Rule 3b-16(a) 
Systems that use the technologies discussed above to automate portions 
of their operations using smart contracts, validators and miners may 
choose to take actions to form a single entity, like an organization, 
and register with the Commission. The Commission preliminarily believes 
that our analysis, given above, adequately addresses these concerns of 
control over the smart contract, which entities may incur the costs of 
compliance, and how large those costs may be. However, the Commission 
acknowledges that these costs may cause some or all of the entities 
that make available such a system to cease the activities that make 
them responsible for the system's compliance, potentially resulting in 
the system's exit from the market.
    Another commenter raises concerns about potential impossibility of 
limiting certain systems' activity to non-securities trading in the 
event that the creators of the system wish to avoid having to comply 
with federal securities laws, stating that it would be impossible for 
any ``organization, group or association'' to ensure no securities are 
made available for trading on such a system.\370\
---------------------------------------------------------------------------

    \370\ See Delphi Digital Letter at 7.
---------------------------------------------------------------------------

    The Commission acknowledges that there may be existing New Rule 3b-
16(a) Systems, with smart contracts designed to permit anyone with 
access to the blockchain to begin trading in any crypto asset supported 
by the blockchain, including those that are securities. In such 
circumstances, the smart contract(s) may have to be altered in order to 
ensure that the system does not trade securities. As discussed above, 
this could be achieved either by any organization, association, or 
group of persons that can make changes to the smart contract, or by the 
miners or validators of the relevant blockchain in the event that the 
smart contracts are immutable.
    Because of the easily accessible nature of many public blockchains, 
the Commission preliminarily believes that construction, deployment, 
and maintenance of a New Rule 3b-16(a) System that uses the 
technologies described above could be achieved by groups of persons who 
are unsophisticated participants in financial markets and may not 
appreciate the significance of maintaining a system that meets the 
definition of exchange as proposed to be amended and therefore of 
having obligations to comply with the relevant securities laws. The 
Commission believes that the costs of compliance for such persons would 
be higher because of their lack of experience with federal securities 
laws. Some such persons may choose to discontinue their systems rather 
than bear the costs of compliance.
ii. Unique Costs for Systems Using Certain Technologies
    The Commission preliminarily believes that certain New Rule 3b-
16(a) Systems may have difficulties in complying with some rules. The 
New Rule 3b-16(a) Systems which may have such difficulties are systems 
which use technologies that, for example, allow them to automate 
portions of their operations using smart contracts deployed on an 
underlying blockchain. The rules for which there may be such 
difficulties include Regulation SCI, as well as the Fair Access Rule of 
Regulation ATS. Systems that use these technologies may have 
difficulties in complying with these rules when compared with platforms 
that do not use such technologies. For example, there may be 
difficulties in ensuring the compliance of SCI systems that run using 
DLT, such as smart contracts.
    One commenter states that the realities of decentralization make 
compliance ``impracticable'' for certain systems, which the commenter 
terms ``DeFi.'' \371\ This commenter questioned

[[Page 29485]]

what entity or group of entities involved in the operation of such a 
system would be responsible for complying with Regulation ATS,\372\ and 
additionally stated that even if this were clear, it was not obvious 
that this party would have the necessary information to fulfill that 
responsibility.
---------------------------------------------------------------------------

    \371\ See a16z Letter at 14.
    \372\ See id. at 3, 14.
---------------------------------------------------------------------------

    The Commission discusses above that a DLT-based market place or 
facilities for bringing together buyers and sellers of securities is 
typically maintained or provided by a single organization but a 
combination of the actors can constitute, maintain, or provide, 
together, a market place for securities as a group of persons, which 
would be considered an exchange under section 3(a)(1) of the Exchange 
Act and Rule 3b-16 thereunder.\373\ The Commission acknowledges that 
there may be some existing systems of this type designed in such a way 
that the information necessary to comply with the disclosure 
requirements of Regulation ATS is not possessed by any singular entity. 
In such a case, the Commission believes that the entities responsible 
for compliance may find it necessary to form an organization or 
designate a member of the group of persons to be responsible for 
compliance, as discussed above,\374\ and that such an organization or 
member of the group of persons would be capable of collecting the 
information necessary to comply. In cases of a system using DLT, where 
some or all of this information is not already possessed by entities 
responsible for compliance, the manner in which the system functions 
may have to be altered to make compliance with registration 
requirements possible. As discussed above,\375\ this could be achieved 
by the organization or group of persons responsible.
---------------------------------------------------------------------------

    \373\ See supra section II.B.
    \374\ See supra section V.C.2.c.i.
    \375\ See supra section V.C.2.c.i.
---------------------------------------------------------------------------

    The Commission believes that access to New Rule 3b-16(a) Systems 
that make extensive use of DLT in their operations may happen through 
processes not common to systems that do not make extensive use of such 
technology. In this case, such a New Rule 3b-16(a) System may have 
significant challenges in ensuring compliance with the Fair Access Rule 
of Regulation ATS.
    The challenges that may be faced by New Rule 3b-16(a) Systems that 
make extensive use of DLT in complying with Regulation ATS and 
Regulation SCI may impose significant costs. It is possible that these 
costs may cause some such systems to exit the market, or to restructure 
their technology to facilitate a lower compliance cost. In addition, 
compliance with the applicable regulations may result in significant 
alteration to the manner in which such systems operate.
3. Efficiency, Competition, and Capital Formation
a. Competition
    The Commission believes that the Proposed Rules could affect 
competition. The Proposed Rules could promote competition by requiring 
ATSs and New Rule 3b-16(a) Systems to operate on a more equal basis in 
the market for crypto asset securities trading services. The Fair 
Access Rule of Regulation ATS could promote competition in the market 
for trading services in the applicable securities markets.\376\ 
Furthermore, the public disclosure of Form ATS-N could promote 
competition and incentivize innovation in the market for trading 
services in the applicable securities markets.\377\
---------------------------------------------------------------------------

    \376\ See infra section V.C.3.a.i.e. for discussion about the 
impact of the Fair Access Rules on competition.
    \377\ See infra section V.C.3.a.i.f for discussion about the 
impact of public disclosure via Form ATS-N under Rule 304 of 
Regulation ATS on competition.
---------------------------------------------------------------------------

    Also, the costs of the Proposed Rules associated with, among other 
things, altering business practices to come into compliance, becoming a 
broker-dealer, filing Form ATS or Form ATS-N as applicable, and 
complying with the Fair Access Rule of Regulation ATS and Regulation 
SCI as applicable could result in higher barriers to entry and 
reduction in the rate of adoption of new technologies in the market for 
crypto asset securities trading services. Furthermore, the requirements 
of broker-dealer registration, Form ATS, and Form ATS-N could reduce 
operational flexibility. The Commission acknowledges that this 
reduction in operational flexibility could, under certain 
circumstances, make it more difficult to innovate. That said, in 
addition to the other benefits discussed above,\378\ the Commission 
believes that the proposed amendments would foster competition by 
requiring current ATSs and New Rule 3b-16(a) Systems to operate on a 
more equal basis in the market for trading services. This, in turn, 
would help promote innovation. To the extent that the Proposed Rules 
result in significant costs for New Rule 3b-16(a) Systems, these 
systems could exit the market for crypto asset securities trading 
services. In particular, to the extent that New Rule 3b-16(a) Systems 
using certain technologies incur higher costs,\379\ there may be a 
higher chance of these New Rule 3b-16(a) Systems exiting the market. As 
in the Proposing Release, the Commission lacks certain information 
necessary to quantify the extent to which entities that otherwise would 
seek to operate as a trading venue in the market for crypto asset 
securities would be dissuaded from doing so.
---------------------------------------------------------------------------

    \378\ See supra section V.C.1
    \379\ See supra section V.C.2.c.
---------------------------------------------------------------------------

    However, the Commission believes that these adverse effects on 
competition could be mitigated to some extent. To the extent that the 
market for crypto asset securities trading services is competitive and 
that a limited number of New Rule 3b-16(a) Systems exit the market, the 
adverse effect on overall competition among trading platforms would be 
mitigated to some extent because the order flow that was being sent to 
exiting New Rule 3b-16(a) Systems would likely be absorbed and 
redistributed amongst other New Rule 3b-16(a) Systems or systems that 
meet the existing criteria of Rule 3b-16(a).\380\
---------------------------------------------------------------------------

    \380\ To the extent that the market for trading services is 
competitive, the adverse effect on competition may not result in a 
significant increase in trading costs for market participants 
because the order flow that was being sent to those exiting New Rule 
3b-16(a) Systems would likely be absorbed and redistributed amongst 
other New Rule 3b-16(a) Systems or systems that meet the existing 
criteria of Rule 3b-16(a).
---------------------------------------------------------------------------

    One commenter states that regulating ``DeFi protocols or CPSs (or 
related parties)'' as exchanges might ``operate as a ban'' due to the 
inability of those entities to comply with registration 
requirements.\381\ Another commenter also states that the proposed 
amendments might amount to a ``back-door prohibition of a vast swathe 
of actual and potential peer-to-peer finance protocols'' due to the 
inability for some entities to feasibly comply.\382\ Another commenter 
states that ``subjecting DeFi systems to a regulatory regime that they 
cannot comply with'' could force them into extinction.\383\
---------------------------------------------------------------------------

    \381\ See DeFi Education Fund Letter at 8.
    \382\ See Wells Letter at 1.
    \383\ See a16z Letter at 11.
---------------------------------------------------------------------------

    The Commission acknowledges that the costs of compliance may be 
greater for market participants that trade crypto asset securities than 
for those that trade non-crypto asset securities. However, the 
Commission believes that the additional costs of compliance experienced 
by market participants that trade crypto asset securities will vary 
depending on the technologies these participants use to perform 
exchange activity. The Commission lacks some information necessary to 
precisely estimate the degree to which these

[[Page 29486]]

market participants may experience greater costs of compliance, but 
expects that such costs would fall within a range. At the lower end of 
the range, the Commission believes that market participants that use 
technologies similar to those commonly used in the market for 
traditional securities, such as off-chain RFQ systems, will also incur 
similar costs of compliance. At the other end of the scale, the 
Commission expects that costs of compliance may be significantly higher 
for market participants that extensively or exclusively use DLT, such 
as smart contracts, to perform exchange activities. Accordingly, while 
the Commission acknowledges that the Proposed Rules could raise 
barriers to entry into the market for crypto asset security trading 
services, the Commission believes that these barriers would be most 
significant for market participants that perform exchange activity in a 
way that extensively or exclusively uses DLT. The Commission 
additionally believes that for market participants that perform 
exchange activity using non-DLT methods, these barriers would likely be 
comparable to those experienced by participants in the market for 
traditional securities trading services.
    One commenter states that the cost of compliance and consequences 
of non-compliance would have the effect of ``chilling, restricting or 
prohibiting outright the creation of code for peer-to-peer digital 
asset trading or websites that provide access to information about 
those protocols.'' \384\ Another commenter states that, to the extent 
that ``adoption of the Proposal will cause the developers of code and 
smart contracts related to a Decentralized Protocol, or the maintainers 
of online websites that merely enable access to a Decentralized 
Protocol, to be captured under the `exchange' definition,'' the 
proposal might cause such persons to cease their activities, ``dealing 
a death blow to new activity in this sector.'' \385\
---------------------------------------------------------------------------

    \384\ See Delphi Digital Letter at 11.
    \385\ See Blockchain Association Letter II at 6.
---------------------------------------------------------------------------

    The Commission does not believe that the amended definition of 
exchange would include the entities responsible for these 
``Decentralized Protocols'', except to the extent that they also engage 
in activity that meets the definition of exchange as proposed to be 
amended in the Proposed Rules.\386\ While the Commission acknowledges 
that the Proposed Rules may impose compliance costs, the Commission 
does not believe that the circumstances in which such entities would 
incur compliance costs would differ from the circumstances in which 
entities in non-crypto asset securities would incur compliance costs, 
namely, at the point at which such an entity engages in activity that 
meets the definition of exchange as proposed to be amended. However, 
the Commission acknowledges that because the compliance costs for 
entities that trade crypto asset securities may be higher than for 
those that trade non-crypto asset securities,\387\ the impact of those 
costs on innovation in crypto asset securities may be greater.
---------------------------------------------------------------------------

    \386\ See supra section V.C.2.a.
    \387\ See supra sections V.C.2.a and V.C.2.c.ii.
---------------------------------------------------------------------------

    One commenter stated that the Proposed Rules might ``drive 
financial innovation offshore.'' \388\ This commenter also added that 
the Proposed Rules ``would preclude the development in the U.S. of many 
software tools and applications, including, but not limited to, DeFi 
protocols.'' \389\
---------------------------------------------------------------------------

    \388\ See DeFi Education Fund Letter at 12.
    \389\ See id. at 17.
---------------------------------------------------------------------------

    The Commission acknowledges that, to the extent that the Proposed 
Rules impose compliance costs on entities responsible for innovation, 
such costs may affect their decision on which jurisdiction they choose 
to operate their business in. However, the Commission believes that 
these costs may be mitigated. The Commission believes that, at the 
lower end of this range, an entity that engages in the development of 
new technologies in the market for crypto asset trading services would 
incur compliance costs only once its innovative technology allows 
investors to trade securities. If such an entity develops its 
technology in an environment that does not enable investors to trade 
securities, such as a testnet,\390\ the Commission does not believe it 
would incur compliance costs in connection with these activities. 
Additionally, while the Commission lacks certain data that would enable 
the Commission to precisely estimate the compliance costs that an 
innovative entity would face once its innovative technology enables 
investors to trade crypto asset securities, it believes that these 
costs would lie within a range. At the lower end of this range, the 
Commission believes that a market participant that uses innovative 
technology similar to technology that is used in traditional financial 
markets would also incur similar compliance costs. At the other end of 
the scale, the Commission expects that compliance costs would be 
largest for entities developing technologies that rely heavily on DLT, 
such as smart contracts, to perform exchange activity, and have minimal 
or no off-chain components. The Commission additionally believes that 
many systems that would experience these higher costs could be 
restructured to make less extensive use of these novel technologies, 
although this could significantly reduce the extent to which these 
systems operate in accordance with ``DeFi'' principles.
---------------------------------------------------------------------------

    \390\ This term refers to a blockchain designed to test 
technologies, such as smart contracts, in a manner that involves no 
risk of monetary loss. Testnets support a set of tokens that are 
distinct from ``mainnet'' tokens, and which are freely available 
from ``faucets'' that add them to wallets on request. As such, 
testnet tokens have no monetary value and are not securities. See 
https://coinmarketcap.com/alexandria/glossary/testnet.
---------------------------------------------------------------------------

    One commenter states their belief that the Proposed Rules would 
cause platforms to either ``operate exclusively outside the United 
States or exit the business,'' due to lack of a ``realistic prospect of 
obtaining SEC authority to operate as an exchange or SEC and FINRA 
authority to operate as an ATS.'' \391\ This commenter notes that the 
Commission had not, at the time of writing, ``registered any digital 
asset platform as an exchange.'' \392\
---------------------------------------------------------------------------

    \391\ See GDCA Letter II at 7.
    \392\ See id. at 13.
---------------------------------------------------------------------------

    While the Commission acknowledges that the Proposed Rules would 
impose costs on New Rule 3b-16(a) Systems that trade crypto asset 
securities, which may in turn raise barriers to entry as discussed 
above or create incentives to exit the market, the Commission disagrees 
that compliance would be ``infeasible.'' The Commission has discussed, 
above, the manner and extent to which it believes that compliance costs 
may create barriers to entry for market participants that seek to trade 
crypto asset securities. To the extent that market participants that 
trade crypto asset securities face barriers to entry or incentives to 
exit due to higher compliance costs, or perceive this to be the case, 
the Commission acknowledges that such entities may instead choose to 
operate outside the U.S. or exit the market.
i. Regulation ATS
(a) Regulatory Framework
    Market participants may consider registered exchanges, ATSs, and 
broker-dealers (e.g., single dealer platforms) to send their order flow 
in crypto asset securities. As discussed in the Proposing Release,\393\ 
to the extent that current ATSs and New Rule 3b-16(a) Systems compete, 
the proposed changes to Exchange Act Rule 3b-16, which would subject 
New Rule 3b-16(a) Systems to the exchange regulatory

[[Page 29487]]

framework, which includes the option to comply with Regulation ATS, 
would promote competition by requiring current ATSs and New Rule 3b-
16(a) Systems to operate on a more equal basis in securities markets. 
The Commission believes this to be the case in the market for crypto 
asset securities as it is in the market for the securities discussed in 
the Proposing Release. To the extent that registered exchanges, ATSs, 
broker-dealers compete for order flows in the crypto asset securities 
market, the differential compliance costs for exchange, ATS, and 
broker-dealer would affect competition across these different types of 
trading platforms. The Commission acknowledges that national securities 
exchanges would incur significantly higher compliance costs than ATSs 
and broker-dealers, and ATSs would incur higher compliance costs than 
broker-dealers. Higher compliance costs could put registered exchanges 
at a disadvantage in competing against ATSs and broker-dealers that 
trade the same types of securities, and similarly put ATSs at a 
disadvantage in competing against broker-dealers. Although registered 
exchanges, ATSs, and broker-dealers may compete for order flows, they 
provide different services and are subject to different regulatory 
obligations. Furthermore, to the extent that New Rule 3b-16(a) Systems 
that use certain technologies to compete with other New Rule 3b-16(a) 
Systems for order flows, higher costs for New 3b-16(a) Systems that use 
certain technologies would put such systems at a competitive 
disadvantage against other New Rule 3b-16(a) Systems.\394\
---------------------------------------------------------------------------

    \393\ See Proposing Release at 15634.
    \394\ See supra section V.C.2.c for discussion about the 
additional costs for New 3b-16(a) Systems that use certain 
technologies.
---------------------------------------------------------------------------

    One commenter states that the Proposed Rules would advantage 
``traditional financial services companies,'' due to ``fundamentally 
dissimilar technologies.'' \395\ This commenter adds that the Proposed 
Rules would ``limit competition and transparency by entrenching 
existing market players'' to the detriment of investors and the public, 
but does not specify who these existing market players might be.\396\ 
The commenter additionally states their concern that the Proposed Rules 
might include in the revised definition of exchange certain entities 
that contribute code ``to an open-source project that subsequently 
allows third parties to engage in trading activity'' but have no 
ability ``to supervise that activity or impose limitations on the types 
of orders that are entered.'' The commenter states that under the 
Proposed Rules, a developer that cannot comply with registration 
requirements might leave the market or provide services to a 
traditional trading platform, ``further entrenching the traditional 
systems.''
---------------------------------------------------------------------------

    \395\ See DeFi Education Fund Letter at 2.
    \396\ See DeFi Education Fund Letter at 10.
---------------------------------------------------------------------------

    The Commission does not believe that the amended definition of 
exchange would include the entities responsible for innovation in the 
markets for crypto assets or crypto asset trading services, except to 
the extent that they also engage in activity that meets the definition 
of exchange as amended in the Proposed Rules.\397\ The Commission 
acknowledges that, to the extent that market participants who trade 
crypto asset securities compete with traditional financial services 
firms and that such market participants incur greater costs of 
compliance,\398\ the Proposed Rules could give traditional financial 
services firms a competitive advantage. Because the Commission lacks 
information on the degree to which such market participants would incur 
greater costs of compliance, the Commission cannot estimate the extent 
of this advantage. Additionally, the Commission believes that the 
Proposed Rules would cause New Rule 3b-16(a) Systems to compete on a 
more equal basis with their main competitors in the market for crypto 
asset securities, which the Commission believes may already be subject 
to federal securities regulations.\399\
---------------------------------------------------------------------------

    \397\ See supra section V.C.2.a.
    \398\ See supra sections V.C.2.a and V.C.2.c.
    \399\ See supra section II.B.
---------------------------------------------------------------------------

    As discussed in the Proposing Release,\400\ the Commission 
acknowledges that some New Rule 3b-16(a) Systems could restructure 
their operations to not meet the Rule 3b-16 criteria as proposed to be 
amended to avoid being subject to Regulation ATS and Regulation SCI if 
the requirements are too burdensome or impair the ability of the 
trading venue to compete. As in the Proposing Release, the Commission 
believes that the risk of this occurring may be mitigated because the 
proposed amendments to Rule 3b-16 may make it difficult for New Rule 
3b-16(a) Systems to restructure their operations to not meet the Rule 
3b-16 criteria as proposed to be amended. To the extent this does 
occur, the benefits and enhancements to competition discussed above 
would be reduced. The Commission believes that these effects would 
apply to New Rule 3b-16(a) Systems that trade in crypto asset 
securities as they would to New Rule 3b-16(a) Systems that trade the 
securities discussed in the Proposing Release.
---------------------------------------------------------------------------

    \400\ See Proposing Release at 15634.
---------------------------------------------------------------------------

    As discussed in the Proposing Release,\401\ the Commission 
acknowledges that subjecting New Rule 3b-16(a) Systems to the 
requirements of Regulation ATS could reduce operational flexibility. 
For example, it would be more costly for New Rule 3b-16(a) Systems to 
implement significant changes to operational facets that would be 
required to be reported on Form ATS or Form ATS-N. This reduction in 
operational flexibility could, under certain circumstances, make it 
more difficult to innovate. The Commission believes this effect would 
apply to New Rule 3b-16(a) Systems that trade crypto asset securities 
in the same manner that it would to New Rule 3b-16(a) Systems that 
trade non-crypto asset securities discussed in the Proposing Release. 
However, as in the Proposing Release, in addition to the other benefits 
discussed above, the Commission believes that the Proposed Rules could 
foster competition by requiring current ATSs and New Rule 3b-16(a) 
Systems to operate on a more equal basis in the market for crypto asset 
security trading services. This, in turn, could help promote 
innovation.
---------------------------------------------------------------------------

    \401\ See id.
---------------------------------------------------------------------------

(b) Compliance Costs of Regulation ATS
    To the extent that the costs \402\ associated with altering 
business practices for New Rule 3b-16(a) Systems to come into 
compliance with Regulation ATS are significant enough to make these 
systems unprofitable, these systems could exit the market for crypto 
asset securities trading services, adversely affecting 
competition.\403\ To the extent that New Rule 3b-16(a) Systems using 
certain technologies incur additional costs to come into compliance 
with Regulation ATS, these systems could have a higher chance of 
exiting the market for crypto asset securities trading services.\404\ 
Furthermore, to the extent the Proposed Rules result in a New Rule 3b-
16(a) System that trades less liquid securities exiting the market for 
trading services, it could increase the trading costs of its

[[Page 29488]]

subscribers if they need to find a new trading venue or are forced to 
go through multiple intermediaries (i.e., broker-dealers) to find 
counterparties. However, to the extent that the market for crypto asset 
securities trading services is competitive and that a limited number of 
New Rule 3b-16(a) Systems exit the market, the adverse effect on 
overall competition among trading platforms would be mitigated to some 
extent.
---------------------------------------------------------------------------

    \402\ See infra sections V.C.3.a.i.c) and V.C.3.a.i.d) for 
discussions about the impact of costs associated with Rule 301(b)(1) 
(broker-dealer registration requirements) and Rule 301(b)(5) (the 
Fair Access Rule) of Regulation ATS on competition, respectively.
    \403\ See supra sections V.C.2.b and V.C.2.c for discussion 
about the costs associated with changing business practices to come 
into compliance with Regulation ATS.
    \404\ See supra section V.C.2.c for discussion about the 
additional costs associated with changing business practices to come 
into compliance with Regulation ATS for New Rule 3b-16(a) Systems 
that use certain technologies.
---------------------------------------------------------------------------

    Furthermore, the Commission preliminarily believes that the 
compliance costs associated with Regulation ATS would have different 
effects on the competitive position of ATSs depending on their size. As 
a result of the Proposed Rules, all New Rule 3b-16(a) Systems would be 
subject to Rule 301(b)(2), Rule 301(b)(9) and Rule 301(b)(10), Rule 
302, and Rule 303. As discussed above \405\ and in the Proposing 
Release,\406\ most of the estimated compliance costs associated with 
these rules would be fixed costs to those New Rule 3b-16(a) Systems 
regardless of the amount of trading activity that takes place on them, 
and thus, these compliance costs would represent a larger fraction of 
revenue for a small (measured in trading volume) New Rule 3b-16(a) 
System relative to that for a large New Rule 3b-16(a) System. 
Furthermore, most of the estimated compliance costs associated with the 
requirements of Form ATS-N under Rule 304, which all New Rule 3b-16(a) 
Systems that trade NMS stocks or government securities would incur, 
would be fixed costs.\407\ This could have an adverse impact on New 
Rule 3b-16(a) Systems of small size in competing against larger ATSs, 
which could act as a deterrent or a barrier to entry for potential New 
Rule 3b-16(a) Systems or result in small New Rule 3b-16(a) Systems 
exiting the market for trading services. However, if small New Rule 3b-
16(a) Systems engage in providing simpler services, these small New 
Rule 3b-16(a) Systems are likely to incur lower compliance costs. The 
Commission believes that these effects would apply to the market for 
crypto asset securities in the same manner that they would to the 
market for non-crypto asset securities.
---------------------------------------------------------------------------

    \405\ See supra section VIII.C.2.a.i.
    \406\ See Proposing Release at note 1165.
    \407\ See supra section VIII.C.2.a.i and Proposing Release, 
section VIII.C.2.a.i.
---------------------------------------------------------------------------

    The Commission acknowledges the Proposed Rules could reduce 
operational flexibility, which could, under certain circumstances, make 
it more difficult to innovate or reduce the rate of the adoption of new 
technologies. As in the Proposing Release, the Commission believes 
that, to the extent the Proposed Rules force an entity that develops 
new technologies to exit the market, it may be able to restructure 
itself (rather than operate as an ATS) as a third-party vendor and 
continue to provide certain innovative services, or otherwise sell its 
technology to another ATS, which would mitigate to some extent any 
adverse impact the Proposed Rules may have on the adoption of new 
technologies in the market for crypto asset security trading services.
(c) Broker-Dealer Registration Requirements
    In addition to the compliance costs associated with the 
requirements of Regulation ATS, non-broker-dealer-operated New Rule 3b-
16(a) Systems without a broker-dealer affiliate would incur additional 
compliance costs related to registering with the Commission as broker-
dealers, becoming members of an SRO, such as FINRA, and maintaining 
broker-dealer registration and SRO membership. Furthermore, these non-
broker-dealer operators could incur costs associated with altering 
business practices to come into compliance with the Proposed 
Rules.\408\ To the extent that the costs associated with changing 
business practices to come into compliance with the Proposed Rules is 
significant enough to render non-broker-dealer operators of New Rule 
3b-16(a) Systems unprofitable to stay in the business, these operators 
of New Rule 3b-16(a) Systems would exit adversely impacting competition 
in the market for crypto asset securities trading services.\409\ 
However, to the extent that the market for crypto asset securities 
trading services is competitive and that a limited number of New Rule 
3b-16(a) Systems exit the market, the adverse effect on overall 
competition would be mitigated.
---------------------------------------------------------------------------

    \408\ See supra section V.C.2.a.ii for discussion about the 
costs associated with changing business practices to come into 
compliance with the Proposed Rules.
    \409\ The Commission believes that the costs associated with the 
broker-dealer registration requirements could adversely affect the 
rate of innovation. See supra sections V.C.3.a.i and V.C.3.a.i.c) 
for discussion about the impact of the Proposed Rules on the rate of 
innovation.
---------------------------------------------------------------------------

(d) Ineffectiveness Declaration
    The proposed ability for the Commission to be able to declare a 
Form ATS-N or Form ATS-N amendment ineffective could result in 
compliance costs for New Rule 3b-16(a) Systems that trade NMS stocks 
and may affect competition in the market for NMS stock trading 
services. However, as discussed in the Proposing Release,\410\ based on 
Commission staff's experience with NMS Stock ATSs that filed an initial 
Form ATS-N, the Commission preliminarily believes this would be an 
unlikely result. The Commission believes this unlikeliness would extend 
to the market for crypto asset securities that are NMS stocks.
---------------------------------------------------------------------------

    \410\ See Proposing Release at 15636 including notes 1180 and 
1183.
---------------------------------------------------------------------------

(e) Fair Access
    The Commission believes that applying the Fair Access Rule to New 
Rule 3b-16(a) Systems could increase competition between market 
participants in the markets for corporate debt securities, municipal 
securities, NMS stocks, and equity securities that are not NMS stocks. 
As discussed above, to the extent that there are market participants 
currently excluded from trading on significant New Rule 3b-16(a) 
Systems, applying the Fair Access Rule to New Rule 3b-16(a) Systems 
could increase trading venue options available to these market 
participants, which could lower their trading costs. This, in turn, 
could increase competition among market participants trading on these 
platforms, which could be significant sources of liquidity and 
represent a significant portion of trading volume in their respective 
markets. However, these competitive effects may be reduced to the 
extent that some existing subscribers of trading venues that are 
subject to the Fair Access Rule redirect their trading interest to 
other trading venues not subject to the Fair Access Rule in order to 
preserve some of the benefits they may receive from a trading venue 
limiting access. If the Proposed Rules to apply certain aggregate 
volume thresholds increase the number of smaller affiliate ATSs that 
would be subject to the Fair Access Rule, it could also increase 
competition among market participants, to the extent that certain 
market participants are currently excluded from accessing these 
platforms. The Commission believes that these effects on competition 
would apply to New Rule 3b-16(a) Systems that trade crypto asset 
securities in the same manner that they would to New Rule 3b-16(a) 
Systems that trade non-crypto asset securities.
    Additionally, as discussed in the Proposing Release, the Proposed 
Rules to apply certain aggregate volume thresholds to the Fair Access 
Rule could also harm competition among trading venues in the markets 
for corporate debt, municipal securities, NMS stock and equity 
securities that are not NMS

[[Page 29489]]

stocks if they cause a broker-dealer or affiliated broker-dealers that 
operate multiple ATSs to restrict trading in one or more securities, or 
shut down one or more of their smaller ATSs, in order to avoid 
triggering the Fair Access volume threshold. However, because the 
trading volume on these smaller ATSs would likely be absorbed and 
redistributed amongst other ATSs or non-ATS venues, the Commission 
believes that the overall effects on competition among trading venues 
may not be significant. To the extent that the markets for trading 
services are competitive, the Commission believes that such competitive 
effects would be applicable to New 3b-16(a) Systems that trade crypto 
asset securities that are corporate debt securities, municipal 
securities, NMS stock, and equity securities that are not NMS stocks.
(f) Public Disclosure
    As discussed in the Proposing Release,\411\ the public disclosure 
of Form ATS-N would enhance the operational transparency of New 3b-
16(a) Systems that trade in NMS stocks, including crypto asset 
securities that are NMS stocks. The enhancement in the operational 
transparency of New Rule 3b-16(a) Systems would promote competition in 
the markets for crypto asset securities trading services. The increase 
in competition could result in lower venue fees, improve the efficiency 
in customer trading interest or order handling procedures, and promote 
innovation. To the extent that non-ATS venues compete with ATSs' order 
flows, the increased operational transparency of ATSs could also 
incentivize non-ATS trading venues to reduce their fees to compete with 
ATSs. The Commission believes that these effects would apply to the 
market for crypto asset securities trading services. However, because 
New Rule 3b-16(a) Systems using smart contracts operate using code 
which may be, at least in part, publicly viewable, it is possible that 
the impacts of Form ATS-N disclosures on competition may be reduced, 
for such systems. However, because this code is not disclosed in a form 
that is standardized or readable to a layman, the Commission believes 
that this reduction of impact may not be significant.
---------------------------------------------------------------------------

    \411\ See Proposing Release at 15637.
---------------------------------------------------------------------------

    As discussed in the Proposing Release,\412\ because the public 
disclosure of Form ATS-N would make it easier for market participants 
to compare the quality of trading services, such as innovative trading 
functionalities, order handling procedures, and execution statistics, 
market participants would be more likely to send their trading 
interests or orders to ATSs, including New 3b-16(a) Systems, that offer 
better trading services. This would promote greater competition in the 
market for trading services and incentivize ATSs to innovate, including 
in particular, technology related to trading services to improve the 
quality of such services to attract more subscribers. The Commission 
believes these effects on competition and innovation would apply to 
ATSs trading in crypto asset securities that are NMS stocks in the same 
manner that they do to ATSs that trade non-crypto asset securities.
---------------------------------------------------------------------------

    \412\ See id.
---------------------------------------------------------------------------

    As discussed in the Proposing Release,\413\ the public disclosure 
of Form ATS-N would also result in market participants redirecting 
their trading interest away from ATSs that offer lower quality trading 
services compared to other ATSs, which could result in these ATSs 
earning less revenue. If the loss in revenue causes these ATSs to 
become unprofitable, they might choose to exit the market. The 
Commission believes these effects would apply to ATSs trading in crypto 
asset securities that are NMS stocks in the same manner that they do to 
ATSs that trade non-crypto asset securities.
---------------------------------------------------------------------------

    \413\ See id.
---------------------------------------------------------------------------

    As discussed in the Proposing Release,\414\ the public disclosure 
of previously nonpublic information regarding innovative operational 
facets of a New Rule 3b-16(a) System that trades NMS stock could 
adversely impact competition in the market for trading services and 
also reduce the incentives for these trading venues to innovate. As in 
the Proposing Release, the Commission believes that the risk of these 
adverse effects occurring would be low, because the information 
disclosed on Form ATS-N is not likely to include detailed enough 
information regarding operational facets or innovations such that the 
public disclosure would adversely affect the competitive position of 
the disclosing ATS. To the extent that any crypto asset security is an 
NMS stock, the Commission believes that these effects would apply as 
described in the Proposing Release to market participants wishing to 
trade such a security.
---------------------------------------------------------------------------

    \414\ See id. at 15638.
---------------------------------------------------------------------------

    As discussed in the Proposing Release,\415\ although the Commission 
acknowledges that some NMS stock ATSs could restructure their 
operations to be non-ATSs to avoid being subject to the public 
disclosure of Form ATS-N, the risk of this occurring may be mitigated 
because the proposed amendments to Rule 3b-16 may make it difficult for 
an ATS, including one that trades crypto asset securities, to 
restructure their operations to be non-ATSs.
---------------------------------------------------------------------------

    \415\ See id.
---------------------------------------------------------------------------

ii. Regulation SCI
    The Commission believes that the requirements imposed by Regulation 
SCI may not have a significant adverse effect on competition in the 
market for crypto asset security trading services, or on market 
participants' trading costs in the market for crypto asset securities.
    As discussed in the Proposing Release,\416\ the Commission believes 
that the compliance costs imposed by Regulation SCI may not have a 
significant adverse effect on competition among SCI ATSs, non-SCI ATSs, 
and non-ATS venues in the NMS stock market due to mitigating factors. 
If SCI ATSs pass on the compliance costs to their subscribers in the 
form of higher fees, SCI ATSs would lose order flow or their 
subscribers to other, non-SCI ATSs and non-ATS venues with lower fees. 
Adverse competitive effects, however, would be mitigated because an SCI 
ATS would likely have more robust systems, fewer disruptive systems 
issues, and better up-time compared to non-SCI ATSs. Furthermore, any 
adverse competitive effect may be minor if an SCI ATS is large and has 
a more stable and established subscriber base than other ATSs and non-
ATS venues. The Commission expects these effects to apply to ATSs 
trading in crypto asset securities that are NMS stocks in the same 
manner.
---------------------------------------------------------------------------

    \416\ See id.
---------------------------------------------------------------------------

    As discussed in the Proposing Release,\417\ the compliance costs 
associated with participating in business continuity and disaster 
recovery plan testing would affect competition among subscribers of SCI 
ATSs and also would raise barriers to entry for new subscribers. 
Because some subscribers would incur compliance costs associated with 
Rule 1004 and others would not, it would adversely impact the ability 
for those subscribers of SCI ATSs to compete. The Commission expects 
these effects to apply to ATSs trading in crypto asset securities that 
are NMS stocks in the same manner that they apply to ATSs that trade 
non-crypto asset securities, but as in the Proposing Release, the 
Commission lacks sufficient information to estimate the extent of 
impact on competition. If larger subscribers of SCI ATSs already 
maintain connections to

[[Page 29490]]

backup facilities including for testing purposes, the adverse impact on 
competition would be mitigated because the incremental compliance costs 
associated with the business continuity and disaster recovery plan 
testing requirements under Rule 1004 would be limited for those larger 
subscribers. The Commission believes that, in the market for crypto 
asset securities as in the market for non-crypto asset securities, new 
subscribers are less likely to be designated immediately to participate 
in business continuity and disaster recovery plan testing than are 
existing larger subscribers because new subscribers might not initially 
satisfy the ATS's designation standards as they establish their 
businesses.
---------------------------------------------------------------------------

    \417\ See id.
---------------------------------------------------------------------------

    As discussed in the Proposing Release,\418\ it is difficult to 
estimate the costs of Regulation SCI for third-party vendors that 
operate SCI systems or indirect SCI systems on behalf of SCI ATSs. If 
Regulation SCI imposes compliance costs on such vendors, the compliance 
costs would affect the competition among third-party vendors in the 
market for SCI systems or indirect SCI systems. If the costs associated 
with Regulation SCI for third-party vendors outweigh the benefits of 
continuing to operate SCI systems or indirect SCI systems on behalf of 
SCI ATSs, these third-party vendors would exit the market for SCI 
systems or indirect systems. In this respect, Regulation SCI would 
adversely impact such vendors and reduce the ability for some third-
party vendors to compete in the market for SCI systems and indirect SCI 
systems, with attendant costs to SCI ATSs. If this happens, SCI ATSs 
would incur costs from having to find a new vendor, form a new business 
relationship, and adapt their systems to those of the new vendor. SCI 
ATSs might also elect to perform the relevant functions internally. If 
the current third-party vendors are the most efficient means of 
performing certain functions for SCI ATSs, and to the extent that any 
third-party vendor exits the market, finding new vendors or performing 
the functions internally would represent a reduction in efficiency for 
SCI ATSs. The Commission expects these effects to apply to ATSs trading 
in crypto asset securities that are NMS stocks, and their vendors, in 
the same manner that they apply to ATSs that trade non-crypto asset 
securities.
---------------------------------------------------------------------------

    \418\ See id.
---------------------------------------------------------------------------

b. Efficiency and Capital Formation
    As discussed in the Proposing Release,\419\ the Commission believes 
the Proposed Rules could promote price efficiency and capital formation 
by reducing trading costs and the potential for systems disruptions on 
ATSs that capture a significant portion of trading volume. As discussed 
in the Proposing Release,\420\ the proposed requirement for certain New 
Rule 3b-16(a) Systems to publicly disclose Form ATS-N could help reduce 
trading costs for market participants. Subjecting significant New Rule 
3b-16(a) Systems to the Fair Access Rule could also help reduce market 
participants' trading costs. A reduction in trading costs could, in 
turn, reduce limits to arbitrage and help facilitate informed traders 
impounding information into security prices, which could enhance price 
efficiency. Extending Regulation SCI and Rule 301(b)(6) would help 
improve systems up-time for ATSs and would also promote more robust 
systems that directly support execution facilities, order matching, and 
the dissemination of market data, which could also enhance price 
efficiency. The Commission expects these effects to apply to ATSs that 
trade crypto asset securities in the same manner that they apply to 
ATSs that trade non-crypto asset securities.
---------------------------------------------------------------------------

    \419\ See Proposing Release at 15639.
    \420\ See id.
---------------------------------------------------------------------------

    Proposed Rules could also adversely affect the price efficiency of 
crypto asset securities. It may no longer be possible for a New Rule 
3b-16(a) System to facilitate trading crypto asset securities for 
crypto assets that are not securities. To the extent that the markets 
for crypto asset securities denominated in crypto assets that are not 
securities reduce transaction costs, market participants would 
experience higher transaction costs, reducing price efficiency, and 
impeding the price discovery process.\421\ Also, if ATSs restrict 
trading volume in certain securities to stay below the Fair Access 
Rule, Regulation SCI, and Rule 301(b)(6) thresholds, it could adversely 
affect price efficiency and capital formation. The Commission expects 
these effects to apply to ATSs that trade crypto asset securities in 
the same manner that they apply to ATSs that trade non-crypto asset 
securities.
---------------------------------------------------------------------------

    \421\ See supra section V.C.2.b for discussion about the costs 
associated with the trading of crypto asset securities for crypto 
assets that are not securities on Communication Protocol Systems.
---------------------------------------------------------------------------

    As discussed in the Proposing Release,\422\ enhanced price 
efficiency could also promote capital formation. On the other hand, the 
Commission believes that the proposed amendments of the Fair Access 
Rule, Regulation SCI, and Rule 301(b)(6) could also adversely affect 
price efficiency and capital formation if ATSs that are close to 
satisfying the volume threshold limit trading over some period restrict 
trading or cease operating to stay below the volume thresholds and 
avoid being subject to these rules. To the extent that this keeps ATSs 
from getting larger, it would increase fragmentation, and thus, 
adversely affect price efficiency in those markets, harming capital 
formation. The Commission expects these effects to apply to ATSs that 
trade crypto asset securities in the same manner that they apply to 
ATSs that trade non-crypto asset securities.
---------------------------------------------------------------------------

    \422\ See id.
---------------------------------------------------------------------------

D. Reasonable Alternatives

    The Commission has considered several alternatives to the Proposed 
Rules: (1) delay subjecting New Rule 3b-16(a) Systems that exclusively 
trade crypto asset securities to the Proposed Rules; (2) subject only 
New Rule 3b-16(a) Systems that trade government securities to the 
Proposed Rules; (3) subject only New Rule 3b-16(a) Systems that trade 
fixed income securities to the Proposed Rules; (4) exempt New Rule 3b-
16(a) Systems that use only non-firm trading interest from the Fair 
Access Rule; (5) exempt New Rule 3b-16(a) Systems that use only non-
firm trading interest from Regulation SCI; (6) stipulate that systems 
offering non-firm trading interest only meet the definition of an 
exchange if they offer anonymous interactions; and (7) use a more 
explicit and prescriptive approach in defining the type of non-firm 
trading interest system that meets the definition of an exchange.
1. Delay Subjecting New Rule 3b-16(a) Systems That Exclusively Trade 
Crypto Asset Securities to the Proposed Rules
    As discussed above, the Commission received comment, and is 
soliciting comment, on the application of the Proposed Rules to systems 
that trade crypto asset securities. As an alternative, the Commission 
could adopt the proposed changes to Rule 3b-16(a), but delay applying 
the changes to New Rule 3b-16(a) Systems that trade crypto asset 
securities.\423\
---------------------------------------------------------------------------

    \423\ Alternatively, a delay could be implemented for other 
types of securities. See supra section III.E. As discussed above, 
for purposes of adopting a different compliance date for New Rule 
3b-16(a) Systems that trade crypto asset securities, crypto asset 
securities could be defined as, for example, securities that are 
also issued and/or transferred using distributed ledger or 
blockchain technology, including, but not limited to, so-called 
``virtual currencies,'' ``coins,'' and ``tokens,'' to the extent 
they rely on cryptographic protocols. The Commission is soliciting 
comment on the definition. See id.
---------------------------------------------------------------------------

    Importantly, this alternative of a delayed compliance period would 
be

[[Page 29491]]

only with respect to the application of the new rules. Notwithstanding 
inclusion of this alternative of providing a delayed compliance date 
with respect to New Rule 3b-16(a) Systems that trade crypto asset 
securities, the Commission emphasizes that operators of trading 
systems, including those trading crypto asset securities, need to 
evaluate whether they meet the criteria of existing Exchange Act Rule 
3b-16(a), and thus must register as a national securities exchange or 
operate pursuant to an exemption to such registration, or meet the 
definition of a ``broker'' or ``dealer'' that is required to register 
with the Commission and become a member of a self-regulatory 
organization. In this regard, the Commission will continue to evaluate 
whether currently operating systems are acting consistently with 
federal securities laws and the rules thereunder.
    Relative to the proposal, this alternative would result in delayed 
benefits and costs because market participants that trade in crypto 
asset securities using New Rule 3b-16(a) Systems would not accrue 
benefits \424\ and costs \425\ discussed in sections V.C.1 and V.C.2 or 
in the Proposing Release until the delayed compliance date. Similarly, 
this alternative would result in delayed effects on efficiency, 
competition, and capital formation discussed above.\426\
---------------------------------------------------------------------------

    \424\ Affected benefits would include delayed enhancements to 
regulatory oversight and investor protection, delayed reductions of 
trading costs, delayed improvements to execution quality, smaller 
enhancements of price discovery and liquidity, and delayed benefits 
from electronic filing requirements as described above. See supra 
section V.C.1.
    \425\ Affected costs would include delayed implementation costs, 
delayed costs associated with broker-dealer requirements, 
ineffectiveness declaration, the Fair Access Rule, Rule 301(b)(6), 
and Regulation SCI, and delayed indirect costs as described above. 
See supra section V.C.2.
    \426\ See supra section V.C.3.
---------------------------------------------------------------------------

    This alternative could result in several additional effects. It may 
be that New Rule 3b-16(a) Systems that trade in both crypto asset 
securities and non-crypto asset securities would have the incentive to 
separate crypto asset securities trading, which would be subject to the 
delay. This could reduce efficiency. Relative to the proposal, New Rule 
3b-16(a) Systems that trade exclusively in crypto asset securities 
would enjoy a competitive advantage for a longer period of time over 
New Rule 3b-16(a) Systems that trade both crypto asset securities and 
securities that are not crypto assets due to delayed compliance costs. 
Furthermore, relative to the proposal, to the extent that crypto asset 
securities of any type of security may be considered substitutes for 
non-crypto asset securities of the same type, and that platforms that 
trade such crypto asset securities compete with those that trade their 
non-crypto asset security counterparts, the platforms that trade crypto 
asset securities would enjoy a competitive advantage over those that 
trade non-crypto asset securities.
2. Subject Only New Rule 3b-16(a) Systems That Trade Government 
Securities to the Proposed Rules
    As an alternative, the Commission considered subjecting only New 
Rule 3b-16(a) Systems that trade government securities to the Proposed 
Rules. New Rule 3b-16(a) Systems play a significant role in the market 
for government securities. One of the roles of these New Rule 3b-16(a) 
Systems is to provide a means to communicate trading interest in the 
dealer-to-customer market. The Commission understands that these 
systems are a significant component of the dealer-to-customer segment 
of government securities market and account for a significant portion 
of the total trading volume in government securities.\427\
---------------------------------------------------------------------------

    \427\ See Proposing Release at 15601 and 15602.
---------------------------------------------------------------------------

    Under this alternative, New Rule 3b-16(a) Systems that trade 
securities other than government securities would not be subject to the 
Proposed Rules. Relative to the proposal, this alternative would result 
in smaller benefits and costs as well as reduced effects on efficiency, 
competition, and capital formation. Market participants that utilize 
New Rule 3b-16(a) Systems to trade securities other than government 
securities would not accrue benefits from the requirements of 
Regulation ATS discussed in the Proposing Release. Under this 
alternative, relative to the proposal, market participants trading in 
securities other than government securities would not accrue the 
benefits of the Proposed Rules including the enhancement in regulatory 
oversight and investor protection, the reduction in trading costs, and 
the enhancement of price discovery and liquidity.\428\ In addition, to 
the extent that ATSs and New Rule 3b-16(a) Systems compete for order 
flows in securities markets other than government securities, ATSs 
would not be able to compete against New Rule 3b-16(a) Systems on a 
more equal regulatory basis, which would adversely impact competition 
relative to the proposal. On the other hand, relative to the proposal, 
the Commission believes that reduced regulatory requirements would help 
maintain operational flexibility, which in turn, would help promote 
innovations for New Rule 3b-16(a) Systems that trade securities other 
than government securities. Furthermore, the Commission believes that 
lower compliance costs would help promote competition in the market for 
trading services with respect to non-government securities relative to 
the proposal.
---------------------------------------------------------------------------

    \428\ See supra section V.C.1 for discussion about the benefits 
of the Proposed Rules.
---------------------------------------------------------------------------

3. Subject Only New Rule 3b-16(a) Systems That Trade Fixed Income 
Securities to the Proposed Rules
    As an alternative, the Commission could consider subjecting only 
New Rule 3b-16(a) Systems that trade fixed income securities that are 
not crypto asset securities \429\ to the Proposed Rules. New Rule 3b-
16(a) Systems play a significant role by providing means to communicate 
trading interest in the dealer-to-customer market in fixed income 
securities trading. The Commission understands that these New Rule 3b-
16(a) Systems account for a significant portion of the total trading 
volume in fixed income securities.\430\
---------------------------------------------------------------------------

    \429\ Fixed income securities would include government 
securities, corporate debt securities, municipal securities, and 
asset-backed securities as discussed in the Proposing Release.
    \430\ See Proposing Release at 15601, 15602, 15605, 15606, 
15607, and 15609.
---------------------------------------------------------------------------

    Under this alternative, New Rule 3b-16(a) Systems that trade 
securities other than fixed income securities would not be subject to 
the Proposed Rules. Relative to the proposal, this alternative would 
result in smaller benefits and costs as well as reduced effects on 
efficiency, competition, and capital formation. Market participants 
that utilize New Rule 3b-16(a) Systems to trade securities other than 
fixed income securities would not accrue benefits from the requirements 
of Regulation ATS discussed in the Proposing Release. For example, 
market participants that trade crypto asset securities via New Rule 3b-
16(a) Systems would not benefit from investor protection provisions of 
Regulation ATS. On the other hand, relative to the proposal, the 
Commission believes that reduced regulatory requirements would help 
maintain operational flexibility, which in turn, would help promote 
innovations for New Rule 3b-16(a) Systems that trade securities other 
than fixed income securities. Furthermore, relative to the proposal, 
the Commission believes that lower compliance costs would help promote 
competition in the market for trading services with respect to non-
fixed income securities.

[[Page 29492]]

4. Exempt New Rule 3b-16(a) Systems That Use Only Non-Firm Trading 
Interest From the Fair Access Rule
    As an alternative, the Commission considered exempting New Rule 3b-
16(a) Systems that only use non-firm trading interests from the Fair 
Access Rule of Regulation ATS. Relative to the proposal, significant 
New Rule 3b-16(a) Systems that only use non-firm trading interests 
would not incur the costs associated with the Fair Access Rule, which 
may potentially include significant costs for altering business 
practices to comply with the rule. On the other hand, to the extent 
that there are market participants who are unreasonably denied access 
to significant New Rule 3b-16(a) Systems that only use non-firm trading 
interests, the execution quality for these market participants would be 
worse relative to the proposal.
5. Exempt New Rule 3b-16(a) Systems That Use Only Non-Firm Trading 
Interest From Regulation SCI
    As an alternative, the Commission considered exempting New Rule 3b-
16(a) Systems that only use non-firm trading interests from Regulation 
SCI. The requirements of Regulation SCI would result in significant 
costs for significant New Rule 3b-16(a) Systems. Relative to the 
proposal, significant New Rule 3b-16(a) Systems that only use non-firm 
trading interests would not incur the costs associated with Regulation 
SCI, which could include significant costs for establishing and 
maintaining geographically diverse backup facilities. This could 
promote competition by lowering the barriers to entry and reducing the 
incidences of exit relative to the proposal. On the other hand, 
relative to the proposal, the frequency and severity of systems issues 
could be higher and the duration of systems issues could be longer, 
which would harm price discovery and adversely impact trading costs of 
market participants.
6. Stipulate That Systems Offering Non-Firm Trading Interest Only Meet 
the Definition of an Exchange if They Offer Anonymous Interactions
    As an alternative, the Commission considered excluding systems that 
only use non-firm trading interests and do not offer anonymous 
protocols \431\ from the definition of an exchange. Under this 
alternative, many significant fully disclosed dealer-to-customer RFQ 
platforms that trade fixed income securities including government 
securities, corporate debt securities, and municipal securities would 
not meet the definition of an exchange, and thus, would not incur the 
costs associated with the Proposed Rules. Furthermore, lower costs 
would help promote innovation in the market for securities trading 
services relative to the proposal. However, because this alternative 
would exclude many significant trading systems that would meet the 
definition of exchange as proposed to be amended that trade fixed 
income securities, the benefits of the Proposed Rules would be 
significantly reduced relative to the proposal.
---------------------------------------------------------------------------

    \431\ An anonymous protocol in this context means that 
counterparties stay anonymous until the terms (i.e., price and 
quality) of the trade is fixed between the two counterparties 
engaged in a transaction.
---------------------------------------------------------------------------

7. Use a More Explicit and Prescriptive Approach in Defining the Type 
of Non-Firm Trading Interest System That Meets the Definition of an 
Exchange
    As an alternative, the Commission considered a more explicit and 
prescriptive approach in defining an exchange by providing a list of 
specific types of systems that meet the definition of an exchange (or, 
by providing a list of specific types of systems that do not meet the 
definition of an exchange). Relative to the proposal, this approach 
would reduce uncertainty and the costs associated with the proposed 
activity-based definition of an exchange. A more explicit and 
prescriptive definition of an exchange could reduce legal costs 
associated with complying with the proposed activity-based definition 
of an exchange.\432\ Furthermore, the reduction in such costs could 
help promote innovation in the market for securities trading services. 
On the other hand, a more explicit and prescriptive definition of an 
exchange could make it easier for a trading venue to modify its systems 
to operate as a non-exchange, which would not be subject to the 
Proposed Rules. Relative to the proposal, this would result in lower 
benefits. For example, market participants that utilize such trading 
venues would not benefit from investor protection provisions of 
Regulation ATS.
---------------------------------------------------------------------------

    \432\ See also supra section V.C.2.b.ii for discussion about the 
costs associated with complying with the proposed functional-test-
based definition of an exchange.
---------------------------------------------------------------------------

E. Request for Comments

    44. In the Proposing Release, the Commission proposed to replace 
the term ``uses'' with the term ``makes available'' before 
``established, non-discretionary methods'' in Rule 3b-16(a)(2) because 
the Commission proposed to include as an established, non-discretionary 
method communication protocols under which buyers and sellers can 
interact and agree to the terms of a trade.\433\ Would this proposed 
change have costs for developers of technology that are not reflected 
in the economic analysis? Would adopting alternative language (such as 
``Uses established, non-discretionary methods (whether by providing, 
directly or indirectly, a trading facility . . .),'' ``[E]stablishes 
non-discretionary methods (whether by providing, directly or 
indirectly, a trading facility or . . .)'') result in different costs 
than the proposed language? \434\
---------------------------------------------------------------------------

    \433\ See Proposing at 15506. See also supra section III.B.
    \434\ See supra Requests for Comment #10-11.
---------------------------------------------------------------------------

    45. Do commenters agree with the Commission's characterization of 
platforms in the market for crypto assets securities? Please provide 
any relevant details that you believe are missing from the Commission's 
description.
    46. Please provide any information on the number and type of venues 
that permit trading crypto asset securities for fiat currency.
    47. Do commenters agree with the Commission's characterization of 
the technology used by systems in the market for crypto assets 
securities? Please provide any relevant details that you believe are 
missing from the Commission's description.
    48. Do commenters agree with the Commission's characterization of 
New Rule 3b-16(a) Systems that trade crypto asset securities? Please 
provide any relevant details that you believe are missing from the 
Commission's description.
    49. Please provide any data on crypto asset securities trading 
volume and trading volume share of New Rule 3b-16(a) Systems.
    50. Please provide any information on the types of protocols used 
by New Rule 3b-16(a) Systems that trade crypto assets securities.
    51. Do commenters agree with the Commission's characterization of 
other methods (other than platforms) of trading in the market for 
crypto assets securities? Please provide any relevant details that you 
believe are missing from the Commission's description.
    52. Please provide any information on the current market practice 
for bilateral voice trading and electronic chat messaging in trading 
crypto assets securities.
    53. Please provide any information on the role of bilateral voice 
trading in the market for crypto assets securities.
    54. Do commenters agree with the Commission's characterization of 
crypto

[[Page 29493]]

asset securities trading services? Please provide any relevant details 
that you believe are missing from the Commission's description.
    55. Would the Proposed Rules enhance regulatory oversight and 
investor protection in the market for crypto asset securities? Would 
requiring New Rule 3b-16(a) Systems that trade crypto asset securities 
to register as broker-dealers help lead to these benefits? Would the 
Proposed Rules lead to improvements in the safeguarding of confidential 
information in the market for crypto asset securities?
    56. Do commenters agree that the Proposed Rules would reduce 
trading costs and improve execution quality for market participants 
that use New Rule 3b-16(a) Systems? Do commenters agree that Regulation 
SCI would improve the resiliency of New Rule 3b-16(a) Systems in the 
applicable securities markets? Do commenters agree that Rule 301(b)(6) 
would improve the resiliency of such systems in the applicable 
securities markets?
    57. Are there any other benefits of subjecting to the exchange 
regulatory framework a New Rule 3b-16(a) System which uses certain 
technologies that allow them to run portions of their operations using 
smart contracts deployed on an underlying blockchain? Please explain.
    58. Do commenters agree with the Commission's assessment of the 
entities that would incur costs in the crypto asset security market as 
a result of the Proposed Rules? If not, please provide examples of 
additional entities that would incur costs.
    59. Do commenters agree with the Commission's assessment of the 
implementation costs estimated in the Reopening Release? If not, please 
provide as many quantitative estimates to support your position on 
costs as possible.
    60. Please provide any insights or data on the costs associated 
with the proposed broker-dealer requirements for New Rule 3b-16(a) 
Systems that are operated by non-broker-dealers.
    61. The Commission solicits comment on any circumstances in which 
actors within a group of persons, which can include, for example, the 
provider(s) of the DeFi application or user interface, developers of 
AMMs or other DLT code, DAO, validators or miners, and issuers or 
holders of governance or other tokens, may incur costs in connection 
with their activities that may constitute, maintain, or provide a 
market place or facilities for bringing together buyers and sellers of 
securities under Exchange Rule 3b-16, as proposed to be amended.
    62. Do commenters agree with the Commission's assessment of the 
costs for systems that use certain technology and trade crypto asset 
securities as described in section V.C.2.c? Please explain.
    63. Do commenters agree with the Commission's assessment that the 
compliance costs associated with bringing a New Rule 3b-16(a) System 
that uses certain technologies that allow them to run portions of their 
operations using smart contracts deployed on an underlying blockchain 
into compliance may be greater than those for other platforms that 
trade crypto asset securities? If so, which costs do commenters expect 
to be greater, and why? Please explain and share any relevant data.
    64. Do commenters agree with the Commission's assessment of the 
costs that may be associated with bringing a New Rule 3b-16(a) System 
that uses certain technologies that allow it to run portions of its 
operations using smart contracts deployed on an underlying blockchain 
into compliance? Do commenters believe that such costs could be 
significant? Please explain and share any relevant data.
    65. Do commenters agree with the Commission's assessment of the 
initial compliance costs for New Rule 3b-16(a) Systems that use certain 
technologies that allow them to run portions of their operations using 
smart contracts deployed on an underlying blockchain? Please explain.
    66. Do commenters agree with the Commission's assessment of the 
costs that miners or validators may bear? Please explain and share any 
relevant data.
    67. Please provide examples of automation of New Rule 3b-16(a) 
Systems by means of immutable smart contracts.
    68. Do commenters agree with the Commission's assessment of the 
impact of the Proposed Rules on efficiency, competition and capital 
formation? Do commenters agree that the Proposed Rules would allow for 
competition among trading systems on a more equal basis? Do commenters 
agree with the Commission's assessment as to the risks of increasing 
barriers to entry and causing current trading systems to exit the 
market? Please explain.
    69. To what extent would the Proposed Rules increase the barriers 
to entry for new trading venues or cause some existing trading venues 
to exit the market? How would these effects vary based on the size and/
or type of trading venue and the securities market in which it 
operates? Please explain.
    70. How would the Proposed Rules affect innovation? Please explain. 
Which provisions of the Proposed Rules would affect innovation the most 
and how? Please explain.
    71. To what extent would the Proposed Rules cause existing trading 
venues to cease operating in the United States, if at all? If the 
Proposed Rules would have any such effect, which provisions of the 
Proposed Rules would be most responsible for this effect, and how? 
Please explain and share any relevant data.
    72. Do commenters agree with the Commission's assessment of the 
effects of an alternative to delay subjecting New Rule 3b-16(a) Systems 
that exclusively trade crypto asset securities to the Proposed Rules?
    73. Do commenters agree with the Commission's assessment of the 
effects of an alternative to subject only New Rule 3b-16(a) Systems 
that trade government securities to the Proposed Rules?
    74. Do commenters agree with the Commission's assessment of the 
effects of an alternative to subject only New Rule 3b-16(a) Systems 
that trade fixed income securities to the Proposed Rules?
    75. For purposes of determining compliance with the Fair Access 
Rule and Regulation SCI, an ATS must determine its trading volume to 
assess whether the ATS is subject to these rules. Does an ATS have the 
ability to obtain the necessary information to calculate thresholds to 
determine if the ATS is subject to Regulation SCI and Regulation ATS? 
Why or why not?

    By the Commission.

    Dated: April 14, 2023.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-08544 Filed 5-4-23; 8:45 am]
BILLING CODE 8011-01-P