a16z aims to establish a policy safe harbor for DEX and DEX applications.

Written by: David Sverdlov, Miles Jennings, Scott Walker, Aiden Slavin

Translated by: Chopper, Foresight News

The U.S. Securities and Exchange Commission (SEC) continues to advance "Project Crypto" with the grand goal of pushing the U.S. capital markets onto the blockchain.

In April of this year, the SEC's Division of Trading and Markets clarified that specific user interfaces may operate without registering as broker-dealers under certain conditions. In June, the SEC proposed to repeal Rule 611 of the National Market System Regulations (Regulation NMS), a move that would eliminate a significant barrier to the development of on-chain securities markets. Last week, the SEC released the "Innovation Exemption Rule," exempting specific trading venues—tokenized securities trading platforms (TSV)—from the definition of "exchange" in the Securities Exchange Act, and some liquidity providers would no longer be classified as "dealers." This series of measures indicates that regulators recognize the potential of blockchain technology to upgrade the financial system and that on-chain markets should not be forced into an incompatible regulatory framework.

The above actions by the SEC are highly commendable. However, the clarification of broker-dealer rules and the proposed repeal of Rule 611 only address some of the regulatory uncertainties facing on-chain markets. The innovation exemption is also an important first step, but it merely provides a mediated pathway for securities markets to go on-chain. As Senator Peirce noted in this exemption-related statement: "This order does not target decentralized finance. Real decentralized systems driven by automated software do not create the core risks that securities regulation aims to address." We agree with this.

We suggest that as the next step in advancing "Project Crypto," the SEC should clarify under what circumstances decentralized exchange protocols (DEX) and application developers providing access to users may be exempt from the exchange registration requirements under the Securities Exchange Act. For this reason, we, along with the DeFi Education Fund, propose to establish a safe harbor rule that exempts relevant parties from the exchange registration obligations.

This safe harbor will provide developers with clear standards for determining when DEX and DEX applications do not need to complete registration, as they neither act as traditional exchanges nor create the types of risks that exchange regulation aims to address. From this perspective, this proposal brings Peirce's macro view down to the exchange regulatory field: when automated systems do not generate the core risks that securities regulation seeks to prevent, market participants require clarity of regulatory boundaries rather than just exemptions. This safe harbor will serve as a complementary addition to the innovation exemption, extending regulatory clarity to truly unregulated systems.

Meanwhile, a16z has submitted a complementary proposal concerning traditional intermediary-type crypto asset trading platforms (CTP), suggesting the establishment of a customized registration framework modeled after alternative trading systems (ATS), allowing crypto asset trading platforms to trade crypto asset securities, non-security trading pairs, and mixed security/non-security trading pairs.

The two proposals together delineate a clear regulatory boundary: DEX and DEX applications that meet the safe harbor criteria will be clearly exempt from completing exchange registration, while other platforms will have a registration channel adapted to their business. We also look forward to participating in the feedback process for this innovation exemption.

Where is the problem?

The background for our broker safety harbor proposal also applies to this proposal. DEX applications are generally embedded in wallets or deployed on web interfaces; they are software systems that allow users to interact with decentralized blockchain systems, without the platform holding assets or acting on behalf of users. They provide user interfaces to help users complete transactions directly on-chain. This opens up a vast space for peer-to-peer trading: users can pay with stablecoins, purchase network tokens on decentralized exchanges, or engage in lending activities without relying on any intermediaries.

DEXs are mostly permissionless smart contract protocols that automatically execute trades based on preset conditions. The most common type, automated market maker (AMM) DEXs, allows users to trade with liquidity pools, without a centralized operator. However, the control of centralized operators creates the very risks that exchange regulation seeks to address, such as conflicts of interest in order matching, potential market manipulation by centralized operators, and the necessity of governance and fair access rules when centralized entities hold market power.

Currently, DEX and DEX applications still face regulatory uncertainties regarding exchange registration. The SEC has at least expressed a position in a Wells Notice: if a DEX or DEX application supports the trading of securities-type assets, it may be classified as an exchange. This regulatory approach has flaws and would stifle innovation in one of the most promising areas of this emerging digital financial system.

The consideration that drove us to draft the broker safety harbor proposal also motivates this submission: requiring all DEX and DEX applications to complete exchange registration would force software developers to assume roles they never intended to take on, acting as gatekeepers and intermediaries, undermining the advantages of the blockchain system itself, and creating new risks for users.

In the following, we will also discuss a complementary proposal for traditional intermediary crypto asset trading platforms. The pain points here are quite evident; there is currently no regulated market in the U.S. where tokenized securities can be traded, regardless of whether these securities are investment contracts, stocks in the national market system, or other combinations of tokenized securities and commodities. Meanwhile, centralized crypto exchanges are also not permitted to engage in such trading pairs. Our proposal fills this gap by creating a registration framework suitable for the early-stage crypto market.

What is the solution?

We propose the establishment of a safe harbor that creates a rebuttable presumption: DEX and DEX applications that support peer-to-peer trading (including the trading of tokenized securities) do not fall within the scope of exchange business. Although this submission primarily focuses on AMM-based DEXs, the proposal is not limited to a specific architecture; we also support Peirce's open attitude toward other tokenized securities trading models.

To qualify for this safe harbor, DEX must meet four objective criteria:

• Non-custodial: DEX never controls user funds. All signatures and transaction submissions are initiated by users.
• Automated: There are no human intermediaries in the execution of transactions and related operations by DEX; no individuals or groups under common control possess unilateral authority to modify system functions, operational logic, or rules.
• Permissionless: DEX does not restrict access and does not grant anyone the power to limit others' access.
• Trustworthy neutrality: It does not grant anyone private permissions, hard-coded privileges, or other differentiated rights, avoiding discrimination against specific users or use cases.

DEX applications also need to meet four objective criteria:

• Non-custodial: DEX applications must not control user funds. As above, all signatures and transaction submissions are initiated by users.
• Objective and verifiable market data: Pricing and market data of DEX applications must be based on pre-disclosed, objective, and independently verifiable parameters; the data source must be public data from the public chain or independent third-party data sources.
• No discretionary authority: Throughout the operation of DEX applications, there are no centralized institutions, governing bodies, or developers exercising discretionary authority in transaction matching, pricing, order matching, or transaction execution, favoring specific users, counterparties, or transactions.
• Limited role of developers: The work of DEX application developers is only to maintain the interface, push technical and security updates, and use objective, non-discretionary screening rules to exclude digital assets; screening standards must be public and neutral, without involving subjective investment judgment, and must not make qualitative assessments of asset values (but identifying fraudulent, malicious, or junk assets does not count as asset value assessment).

Additionally, the complementary proposal for crypto asset trading platforms suggests that CTP regulation refer to the alternative trading system (ATS) model, allowing platforms to register with the SEC and the Financial Industry Regulatory Authority, supporting trading of crypto asset securities, non-security trading pairs, and mixed security/non-security trading pairs. When CTP trading falls under the category of nationwide market system stocks for crypto asset securities and trading volumes exceed threshold levels, public disclosure obligations of Form ATS-N must be fulfilled. When trading volume is below the threshold, CTP must confidentially submit disclosure materials to the SEC and subscribing users (disclosing conflicts of interest, core operational mechanisms, and details related to fair access), and the corresponding ATS equivalent form for CTP will not be made publicly available. Finally, CTP must comply with record-keeping requirements similar to those of ATS and allow the use of blockchain-based records.

Why propose it now?

Blockchain technology has immense value; it can reduce costs, enable fast settlements, and broaden financial service coverage, and DEX and DEX applications are key to realizing this value. Centralized markets for tokenized securities also need a tailored regulatory infrastructure, just as the mechanism recently implemented by the SEC through the innovation exemption rule allows tokenized securities to trade in a regulated market.

Congress has missed the legislative window. Regulators should promote industry development through guidelines, exemption permits, and routine rule-making and must use these tools decisively. Our proposal provides a clear and feasible path, delineating regulatory boundaries and supporting the responsible development of decentralized systems and crypto asset trading platforms in the U.S.