Wintermute urges SEC to exempt on-chain settlement from legacy rules

Over-the-counter (OTC) platform Wintermute Trading has urged US regulators to exempt dealers from existing rules when settling tokenized securities on blockchain networks, arguing that decades-old regulations are stifling innovation in digital asset markets.

In a follow-up submission to the Securities and Exchange Commission’s Crypto Task Force, the London-based firm pressed for clarity on two key issues, which are allowing dealers to settle trades directly on-chain without triggering customer protection rules and ensuring that liquidity providers on decentralized finance protocols are not forced to register as dealers.

On-chain settlement without legacy infrastructure

Wintermute’s primary concern centers on Rule 15c3-3, the so-called Customer Protection Rule, which was designed to prevent broker-dealers from misusing client assets.

The firm says that when dealers settle tokenized securities directly on blockchain with counterparties who control their own digital wallets, they should qualify for an existing exemption that allows dealers to avoid maintaining special bank accounts for customer protection.

“Imposing a bank, and legacy infrastructure, into a blockchain-based settlement cycle would completely undermine and eliminate the benefits and efficiencies of a dealer’s on-chain settlement process using its own wallet and key management software,” Wintermute wrote in its October submission to Commissioner Peirce and task force members.

After its follow-up meeting with the SEC, Wintermute stated that the “Current rules were written for an era of multiple layers of intermediation. For blockchain settlement, those multiple layers aren’t needed and actually remove the efficiency benefits the technology provides.”

“Regulated dealers should be empowered to develop their own clearance and settlement procedures for tokenized securities, without triggering rules applicable to broker-dealers that provide clearing services to customers. This would allow dealers to settle trades directly on-chain with counterparties, with tailored risk management standards,” the OTC platform wrote.

The trader-dealer divide in DeFi markets

Wintermute’s second request concerns the longstanding distinction between “dealers,” who must register with the SEC, and “traders,” who buy and sell solely for their own accounts. 

The firm wants confirmation that proprietary traders and liquidity providers on decentralized finance protocols should not be considered dealers simply because they provide liquidity to markets.

Wintermute wrote on X that “Proprietary trading and liquidity provision on DeFi protocols should not trigger dealer registration.”

If a firm trades only for its own account and doesn’t interact with customers, that activity fits the long-standing “trader exemption” it added.

Wintermute’s advocacy in the crypto market

The broker-dealer exemptions that Wintermute seeks could substantially lower the friction for on-chain settlement and reduce cost and operational drag. 

This could, in turn, increase institutional adoption of tokenized securities. However, such a shift raises important questions about investor protection and market integrity. Less intermediation means fewer layers safeguarding clients, and regulators will want assurances that on-chain mechanisms are robust.

In September, Wintermute advocated that the SEC make clear that network tokens, such as Bitcoin and Ether, should not be treated as securities. It said that these tokens are better viewed as infrastructure, collectibles, or commodities, and that mislabeling them would stifle innovation and push trading outside the US market.

How the SEC responds will be closely watched across the digital-asset industry, with Wintermute commending the regulator for its “continued openness to dialogue on how existing regulations can adapt to blockchain-based markets.”

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