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Two recent, highly technical proposals could solidify the Securities and Exchange Commission's (SEC) grasp on the U.S. crypto market, leading the industry to take another stand against what it sees as the wrong approach to government oversight.

Chairman Gary Gensler has argued the SEC should be the lead regulator of the crypto world because of its role as the top cop for the U.S. securities markets. But lobbyists and lawyers for digital assets firms and their trade groups oppose a February proposal they believe may expand how the SEC defines "regulated exchanges" in such a way that it encompasses a wide swath of crypto platforms. In the meantime, the SEC announced another proposal that seems to follow the same pattern: potential oversight of the crypto industry without making that intention explicitly clear.

For the initial rule proposal, which would reset the SEC’s regulations for so-called alternative trading systems and expand the definition for what makes an exchange, the agency set a brief, 30-day window that closes Monday. The crypto industry’s growing Washington, D.C., contingent is arguing this February policy would be a harmful overreach into interactions between people rather than just their transactions and – as it stands – it’s too opaque for crypto businesses to know where they may run afoul of the agency.

“We think that there’s a potential threat to the industry if this rule were enacted,” said Sarah Milby, a senior policy manager for the Blockchain Association in Washington, arguing the proposal is bad policy that crypto firms see as a “backdoor route to regulation.” She said the agency should be “more forthright” in the rules it’s developing.

The SEC did not respond to a request for comment.

“The central question this proposal raises is whether the SEC can and should regulate platforms where buyers and sellers only talk about trading,” said Bill Hughes, senior counsel and director of global regulatory matters at ConsenSys, who also criticized the way the agency seems to be approaching the industry.

Hughes helped draft ConsenSys’s comment letter on the proposal, which was published Monday.

“There is no mention of crypto, blockchain or [decentralized finance] in the 654 pages of the rule, but whether this proposal applies to crypto is very much an open question given how broadly it is written,” Hughes said. “That sort of transparency is precisely what the federal rule-making procedures are intended to provide.”

'Retail investors'

However, in recent remarks Gensler suggested that alternative trading platforms are more typically used by institutional investors, not the individuals more likely to be involved in crypto trading. Gensler said he told his staff to weigh whether investor protections “on exchanges with which retail investors interact should apply to crypto platforms.”

That’s signaling he’s thinking of crypto platforms as national securities exchanges, according to a recent note from law firm Sidley Austin.

Whatever category the SEC eventually decides is right for digital assets firms, Gensler said it’s almost certain his agency will have a say because, “with so many tokens trading, the probability is quite remote that any given platform has zero securities.”

The second, more recent rule, proposed March 28, would redefine what it means to be a securities dealer, including people and businesses using automated and algorithmic technology to execute trades. Unlike the first proposal, this one did nod toward the industry once, saying in its 36th footnote that, yes, the SEC had its eye on “any digital asset that is a security.”

“This follows very quickly on the heels of the [alternative trading systems] rule,” Milby said, which she argued makes it seem as if “the SEC is hastily trying to make regulations without fully understanding the effects and costs of those potential rules.”

Bill Hughes said he expects the industry will take the agency to court if a final version of the exchanges rule looks much the same as the proposal. Legal challenges have sometimes been successful in reversing policy efforts from the securities watchdog.

“These rule changes have the potential to capture a vast array of new technologies, and the persons who develop and advance those technologies,” said Michelle Bond, the chief executive officer for the Association for Digital Asset Markets in Washington. “This has the potential to chill further development in the United States of digital asset technologies.”

Key Republican lawmakers have also criticized the proposed rules.

"The rule makings fail to define the SEC’s statutory authority," Rep. Patrick McHenry of North Carolina – the ranking Republican on the House Financial Services Committee – and Rep. Bill Huizenga (R-Mich.) wrote to the SEC. They argued the regulator "fails to identify the problem that the rulemakings are intended to solve, particularly as it relates to requiring certain market participants facilitating digital asset transactions to register with the SEC."