Topic: New SEC Requirement for DEX Liquidity Providers (Read 307 times)

I completely agree with you that DEXs are inconvenient for traders in many ways, but there are always greater risks for people who cannot officially verify their income.
A friend of mine has over a million dollars on the exchanges, and his lawyer contacts the VIP manager of the exchange every quarter and provides the exchange with tax returns and all the necessary documents, and even despite this, the trader’s account is blocked several days in a year.

That's one of the main inherent deficiencies of CEXes and a major reason for the existence of DEXes. On the other hand DEXes are much slower and have higher fees per one trade. While they are fine for converting one crypto to another or maybe to/from fiat, they are not suitable for trading algorithms that require latency < 10ms or even < 100ms. So I think that the main problem with DEXes is not low liquidity, I used them in a couple of cases and they are fine as long as you are not in a hurry, but they are just too slow and expensive for many trading algorithms.

Anyone who manages to create an exchange that combines the benefits of DEXes and CEXes will make a killing. It could be a low-latency DEX or maybe a no-KYC CEX with some kind of really smart contract that guarantees the user that he would be able to withdraw his funds thus guaranteeing that the CEX won't be able to block the funds and require a KYC. Or maybe some other kind of system that provides the benefits of both kinds of exchanges.

Yeah, not being able to keep one's mouth shut is the main cause of failure in 95% of cases :-)
But joking aside, most people, including those so called "hackers" don't have a deep understanding of computer security and security in general. So they are rather easy to catch and the main reason some of them are able to get away with their petty crimes is that the governments are busy chasing the big fish and the small ones are not paid attention to. Anything related to the banks' electronic money and the governments' CBDCs is trivially traceable by the government. If we add the fact that transactions of most popular cryptocurrencies are publicly visible and we can be sure that for most people crypto does not add any privacy.

Any CEX says in the user agreement that they can require KYC and a source of funding from the client and much more. If you have 1-2 thousand dollars there, then there will be no questions until this amount exceeds 10,000 or more.
My friends lost money on such exchanges. They had several thousand and traded for several years. After transferring 20-40 thousand dollars to the exchange, their funds were blocked.

On the second point, I meant that people talk a lot. Even the most famous hackers were let down by their language and lifestyle.

I am not sure how long the US will continue with such an aggressive attitude towards crypto business. They earlier used SEC to pressurize the CEX and now they are trying an alternate approach to pressurize DEX. In such a situation, these companies would shift their base to countries as miners did when they got banned in China. What I understood till now is they are using ETFs to start controlling popular cryptocurrencies and Bitcoin. At the same time, they are going after CEX earlier and DEX now to expand their control under a centralized institution named SEC.

There is no point in counting enthusiasts separately from the regular users. If at some point the decentralized ecosystem becomes more widely used, then it will have more liquidity because users provide liquidity. Currently there are lots of non-KYC CEXes that are arguably easier to use than DEXes and that is why all the "excess" liquidity goes to the non-KYC CEXes instead of the DEXes. If these non-KYC exchanges are forced to stop working or start requiring KYC, then all that liquidity will move to the DEXes.

For crypto <-> crypto trades on non-KYC DEXes informants are pretty much useless because traders don't involve any third parties and the traders don't know each other because all traffic is routed via Tor and/or I2P.

Informants can and most likely are already used when trading crypto <-> fiat, because the side that sends fiat must know the recipient's identity to send the fiat. Or they meet in person, which allows easy identification of the two parties involved.

So crypto <-> fiat exchange is pretty much the only weakness of the cryptocurrencies that will be attacked by the governments. Any other limitations that the governments try to impose are mostly smoke and mirrors and I think it is good that the governments waste time and effort of something that will not work.

Yes, China is able to confront the United States economically. China is not better off than the United States and is not a friend of crypto, but this game is being played because there is a cold economic war between China and the United States, and because of these hostile policies that the United States is pursuing towards crypto companies, it gives a valuable opportunity to China. To pull the rug from under its feet and attract it towards Hong Kong, which belongs to China, through the openness laws it issued in the recent period.

There are many companies that have already moved to Hong Kong or opened offices there, and with the continued US tightening policy, I believe that most companies will migrate there.

The only country that can counter the American influence is China. China has a region under its control that has now become a hub of crypto investment and that is Hong Kong. The United States cannot pursue any organization or individual that has relocated to that region of the world. They anticipated that the Americans would employ tactics to regulate cryptocurrencies and the related industry. Therefore, they are implementing favorable laws for cryptocurrency businesses and encouraging people to move to Hong Kong.

I understand that large companies want to tap into the opportunity that they get in the US. That they will only be able to do this if the law favors them and helps them to grow in the market. What we are seeing is favorable laws being laid for those companies that are in the financial business and unfavorable laws for those who were never part of the financial business in the past. Such steps will only hamper their economy and will help their rivals to grow.

I always show my opponents this link so that they understand what decentralization is.
It is a decentralized ecosystem, but it is not in demand.  Or do you think that enthusiasts will provide good liquidity in such ecosystems?
https://defillama.com/chain/EthereumClassic
You are right that KYC and whitelisting are not the only way. The easiest way is to pay rewards to informants.

Also, America's enforcement of regulations and rules being created under their jurisdiction might become the template for other countries to follow and implement under their jurisdictions. It is very head scratching when some people in this forum expressed happiness and cheer when the American government began taking down CZ. It was for them very a bullish act, however, what it was is the beginning of creating new limits on our freedom in the cryptospace.

If the source code for these DEXes is distributed under GPL or a similar license, then it is pretty easy to fork the DEX codebase remove the KYC and whitelist checks and start the same DEX under a different name, without the KYC and whitelists. In that case I would expect that users and their money will move from the old to the new DEX.

The governments may try to make illegal development of KYC-less DEXes, but I am not sure if that will work either.

The most likely to work approach is to put under control the conversion of crypto to and from fiat. That approach will be especially effective once they replace cash and most of bank money with CBDCs.

I have already written about how this system works. If you have 1000 dollars in your account, then there is no point in following you and wasting resources. You will either lose tokens or your balance will increase to such an amount that they will monitor you and wait until you make a mistake and transfer the tokens to the custodial service.
And many well-known large DEHs will work through white lists and KYC providers in a few years.

The SEC  only governs the American financial system, but America rules the world. All countries in the world fear American sanctions, so they will abide by American laws and standards. Therefore, the laws enacted by America quickly turn into almost universal laws.

In addition, all large companies want to work in the United States because it is the center of global finance and trade, but with such strict laws, I think that companies will leave the United States little by little to search for a more open environment.

That looks absurd to me as the SEC only governs the US financial system. Why would anyone outside the US try to go for it? They can easily leave the US and operate in a third world country without getting traced. DEX was built because CEX failed to comply with the concept of privacy, it is easy to make a CEX follow its rules whereas it is not easy for anyone even the government to control a DEX which is being controlled by an anonymous owner and their employees.

Look at the condition of the Binance CEO he accepted his punishment, paid those fines which looked more like extortion to me, and still was jailed. Does anyone know any owners of a DEX or those who are funding the liquidity of a particular token? It is a stupid law and it will remain stupid for me unless it has some substantial elements that prove that these guys can be traced who are pumping money.

This is certainly why the future of DeFi and the cryptospace is to go anonymous very much similar to many ICO projects during 2016 and 2017. There will be scammers, however, there will also be good projects being created. It will be the responsility of the trusted people of the community to inform others on which projects to use.

I reckon this is the real purpose of the community and this forum also. People who have been here longer have a responsibility that newbies should not be scammed and newbies that become older members should have an inherited responsibility to inform the next newbies.

Yes, your point of view is reasonable, but here we have an important question: How will they be able to prosecute violators if they do not have the required information?

I mean for a DEX that doesn't enforce KYC and protects user privacy how are they going to force them to provide information? Does this mean they will force every DEX to submit to KYC, AML and anti-terrorism standards? Then all this sensitive information will be in the possession of the American government!!

Are there any liquidity providers that accept these new standards?

Well, that's what exactly the US government wants! They have been chasing the cryptocurrency market and the participants since a long time now and this one is just a new addition to their arbitrary rules. But I really doubt that decentralized exchanges will comply to the rule. Because if they do so, they will be forced to submit their users data to the government. In summary, decentralized exchanges will have to become a centralised exchange. That is directly against the idea of a decentralized exchange.

I think they can move to crypto friendly countries like Singapore. Their door is always open for new businesses. 

Gary Gensler may look like a clown sometimes, but he's no fool. Any collar should be put on gradually. At first the sum will be 50 million, and many people don’t care about it. Then the amount will decrease to 5 million, but it will be difficult to argue with this, because there will be large fines or prison sentences for violations. And in the United States, such crimes have no statute of limitations. And then this amount can be reduced to 100-500 thousand.

What is this bullshit? Registration under the rules of the Securities and Exchange Commission means submitting documents, identification papers, revealing identity and all other details, as well as providing proof of the source of funds, etc. This is completely inconsistent with the concept of DEX. Who will surrender their neck to the sword of the American government?

Now liquidity providers have two options: either operating underground illegally or fleeing to a place outside the authority of the US government.

Gary thinks he can turn DEX into central banks under government control, this guy is getting so funny I think he needs a psychiatrist!!!

Seems like it only applies to those living in the US. I mean, technically, if you service US-based clients and are not cleared with the SEC, seems like it could create some legal trouble. But they'd have to bother finding out who you are, do a full investigation, and then bring extraditable charges against you.

The whole point of a DEX is that nobody can shut it down as there is no single point of failure, legally or otherwise. In principle, anyway.

Hehehehehee that is funny!

In any case, what can the SEC presently do if these anonymous whales who have more than $50 million in stablecoins provide liquidity in different DEXs, AMMs and decentralized lending and borrowing services from different wallets containing under $50 million?

Uncle Gary has a headscratching problem for his bald head hehe.

I will support some measures put in place to protect investors from scams and shady deals but it shouldn't be targeted at controlling Bitcoin. SEC and other regulatory agencies will always claim that they are protecting investors and also upholding the integrity and transparency of the crypto market. But they also have other goals which is to monitor transactions.

Indeed, most of us don't need to worry because we don't engage in such high transactions. But if it affects the community, it also affects us. One day you might need the services of these CEXs. They are trying to control the Bitcoin ecosystem.  

At least I don't need to worry

https://www.sec.gov/news/press-release/2024-14

" Feb. 6, 2024 —
The Securities and Exchange Commission today adopted two rules that require market participants who engage in certain dealer roles, in particular those who take on significant liquidity-providing roles in the markets, to register with the SEC, become members of a self-regulatory organization (SRO), and comply with federal securities laws and regulatory obligations.
..
Under the final rules, any person that engages in activities as described in the rules is a “dealer” or “government securities dealer” and, absent an exception or exemption, required to: register with the Commission under Section 15(a) or Section 15C, as applicable; become a member of an SRO; and comply with federal securities laws and regulatory obligations and applicable SRO and Treasury rules and requirements."

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"Liquidity providers on DEXs with assets greater than $50,000,000 are required to register with the SEC rules ."