# Public Comments Re: Amendments to Exchange Act Rule 3b-16 Regarding the Definition of “Exchange” The Commission should withdraw the proposed amendments to Rule 3b-16, recognize that decentralized finance (DeFi) protocols do not constitute covered exchanges requiring registration under a proper functional test, and permit trading systems—including DeFi systems under a voluntary registration framework—to demonstrate the ability to satisfy standards through automated configurations and controls. June 15, 2023 • Public Comments By [Jack Solowey](https://www.cato.org/people/jack-solowey) and [Jennifer J. Schulp](https://www.cato.org/people/jennifer-j-schulp) [ Download PDF ](https://www.cato.org/sites/cato.org/files/2023-06/solowey-schulp-public-comments-6-13-2023.pdf) Dear Ms. Countryman: We appreciate the opportunity to comment on the Securities and Exchange Commission’s proposed amendment to Exchange Act Rule 3b-16, which defines certain terms used in the statutory definition of “exchange.” 1 The Cato Institute is a public policy research organization dedicated to the principles of individual liberty, limited government, free markets, and peace, and the Center for Monetary and Financial Alternatives focuses on identifying, studying, and promoting alternatives to centralized, bureaucratic, and discretionary financial regulatory systems. The opinions we express here are our own. The Commission should withdraw the proposed amendments to Rule 3b-16, recognize that decentralized finance (DeFi) protocols do not constitute covered exchanges requiring registration under a proper functional test, and permit trading systems—including DeFi systems under a voluntary registration framework—to demonstrate the ability to satisfy standards through automated configurations and controls. **I. A Functional Test for Covered Exchange Activity Should Exclude DeFi** The Commission seeks to apply what it considers a “Technology Neutral and Functional Test of the ‘Exchange’ Definition” to DeFi systems, pointing to an assessment that is based on functions performed and not “how an entity may characterize” itself or its technology. From this, the Commission concludes that activities performed using “so-called ‘DeFi’ trading systems,” depending on the facts and circumstances, already could meet the criteria of existing Rule 3b16 and therefore “constitute exchange activity.” In addition, the Commission preliminarily finds that certain DeFi systems would fall under the proposed amended Rule 3b-16. Notably, the Commission in both the Proposing Release and the Reopening Release recognizes that the changes to Rule 3b-16 will result in the rule covering more activity than it otherwise would have, including the activity of some DeFi systems. Notwithstanding the Commission’s invocation of a functional approach, the application of a bona fide functional test for exchange characteristics to DeFi systems demonstrates that DeFi protocols are not properly considered exchanges subject to the registration required of traditional exchange intermediaries. [![Public Comments Re: Amendments to Exchange Act Rule 3b-16 Regarding the Definition of “Exchange” cover](/sites/cato.org/files/styles/serial_cover_phone/public/2023-06/solowey-schulp-public-comment-6-13-23-cover.png?itok=0HGp4Wbc)](https://www.cato.org/sites/cato.org/files/2023-06/solowey-schulp-public-comments-6-13-2023.pdf) ### Download This Public Comment ##### Public Comments Re: Amendments to Exchange Act Rule 3b-16 Regarding the Definition of “Exchange” [ Download PDF ](https://www.cato.org/sites/cato.org/files/2023-06/solowey-schulp-public-comments-6-13-2023.pdf) ##### About the Authors [![Jack Solowey cropped](/sites/cato.org/files/styles/author_picture/public/2023-12/jack-solowey-cropped-1.jpg?itok=6fpRyXQw)](/people/jack-solowey) ##### [Jack Solowey](/people/jack-solowey) Former Policy Analyst, Center for Monetary and Financial Alternatives, Cato Institute [ ](https://x.com/JackSolowey) [ ](mailto:jsolowey@cato.org) [![New Jennifer Schulp cropped image](/sites/cato.org/files/styles/author_picture/public/2023-03/jennifer-schulp-cropped-2.jpg?itok=kdrnmhHr)](/people/jennifer-j-schulp) ##### [Jennifer J. Schulp](/people/jennifer-j-schulp) Former Director of Financial Regulation Studies, Center for Monetary and Financial Alternatives, Cato Institute [![Creative Commons License](/build/cato_2020/images/creative-commons.svg)](http://creativecommons.org/licenses/by-nc-sa/4.0/) This work is licensed under a [Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License](https://creativecommons.org/licenses/by-nc-sa/4.0/). [ Download PDF ](https://www.cato.org/sites/cato.org/files/2023-06/solowey-schulp-public-comments-6-13-2023.pdf)