---------------------------------------------------------------------------

b. Reduction of Trading Costs and Improvements to Execution Quality
    As discussed fully in the Proposing Release, the Proposed Rules
would help enhance operational transparency, reduce trading costs, and
improve execution quality for market participants by requiring public
disclosure of Form ATS-N and applying the Fair Access Rule to certain
ATSs.\260\ The Commission believes that benefits associated with these
rules would accrue to market participants trading crypto asset
securities of the appropriate asset class, in the same manner and to
the same extent discussed in the Proposing Release. However, because
some New Rule 3b-16(a) Systems involve systems which run with an on-
chain component,\261\ and therefore may operate using code that is, at
least in part, publicly viewable, it is possible that the benefit of
Form ATS-N disclosures may be reduced for such systems. However,
because this code is not disclosed in a standardized or human-readable
form, the Commission believes that this reduction of impact may not be
significant.
---------------------------------------------------------------------------

    \260\ See id. at 15620-21.
    \261\ For example, the system may be run in part by smart
contracts deployed on a blockchain. See supra section V.B.1.a for
additional discussion of such systems.
---------------------------------------------------------------------------

c. Enhancement of Price Discovery and Liquidity
    As discussed fully in the Proposing Release, the Proposed Rules
would help enhance the price discovery process and liquidity in
securities markets by applying broker-dealer registration requirements
of Regulation ATS, Regulation SCI, and the Capacity, Integrity, and
Security Rule (i.e., Rule 301(b)(6) of Regulation ATS) to certain New
Rule 3b-16(a) Systems.\262\ The Commission believes that benefits
associated with these rules would accrue to market participants trading
crypto asset securities of the appropriate asset class, in the same
manner and to the same extent discussed in the Proposing Release.
---------------------------------------------------------------------------

    \262\ See id. at 15621-22.
---------------------------------------------------------------------------

d. Electronic Filing Requirements
    As discussed fully in the Proposing Release, the Proposed Rules
would benefit market participants by improving the usability,
accessibility, and reliability of the new disclosures, by requiring a
structured data language and a publicly accessible filing location for
the applicable required disclosures.\263\ Of these benefits, some are
associated with rules that apply to all securities, and the rest are
associated with rules that apply only to securities of specific asset
classes. The Commission believes that benefits associated with rules
that apply to all securities would accrue to market participants
trading crypto asset securities in a manner similar to the description
in the Proposing Release, and to a similar extent. The Commission
additionally believes that benefits associated with rules applying only
to specific asset classes would accrue to market participants trading
crypto asset securities of the appropriate asset class, again in the
same manner and to the same extent discussed in the Proposing Release.
---------------------------------------------------------------------------

    \263\ See id. at 15623.
---------------------------------------------------------------------------

    However, because some New Rule 3b-16(a) Systems involve systems
which run with an on-chain component,\264\ and therefore may operate
using code that is, at least in part, publicly viewable, it is possible
that the benefit

of Form ATS-N disclosures may be reduced for such systems. However,
because this code is not disclosed in a standardized or human-readable
form, the Commission believes that this reduction of impact may not be
significant.
---------------------------------------------------------------------------

    \264\ For example, the system may be run in part by smart
contracts deployed on a blockchain. See supra section V.B.1.a for
additional discussion of such systems.
---------------------------------------------------------------------------

2. Costs
    The Commission received comments on the Proposing Release stating
that the Commission had not considered the costs of the Proposed Rules
to New Rule 3b-16(a) Systems that trade crypto asset securities.\265\
In this section the Commission is supplementing the analysis of costs
provided in the Proposing Release with additional analysis that details
the extent and manner in which the costs discussed in the Proposing
Release would apply to New Rule 3b-16(a) Systems that trade crypto
asset securities.
---------------------------------------------------------------------------

    \265\ See GDCA Letter II at 6; Crypto Council Letter at 4;
McHenry/Huizenga Letter at 2; Coinbase Letter at 2; a16z Letter at
7.
---------------------------------------------------------------------------

    The Commission is relying on the analysis in the Proposing Release
to form the basis for its discussion of the costs of Proposed Rules for
systems trading crypto asset securities.\266\ This is because the
Commission believes that the functioning of New Rule 3b-16(a) Systems
that trade crypto asset securities are broadly similar to the
functioning of other New Rule 3b-16(a) Systems discussed in the
Proposing Release. The Commission preliminarily believes that in some
cases the costs of compliance may be higher for New Rule 3b-16(a)
Systems in the market for crypto asset securities than for other New
Rule 3b-16(a) Systems. This is because in some cases the market for
crypto asset securities utilizes different technology and methods of
operation \267\ than is utilized in markets for non-crypto asset
securities. In addition, throughout the discussion in this Reopening
Release, the Commission has a greater degree of uncertainty in its
analysis of the costs that the Proposed Rules would impose on market
participants than it did in its discussion of costs for non-crypto
asset securities. This is because the Commission has less data on the
functioning of the market for crypto asset securities.\268\
---------------------------------------------------------------------------

    \266\ See id.
    \267\ Such different technology may include, for example, smart
contracts.
    \268\ See supra section V.B.1.
---------------------------------------------------------------------------

    In addition, the Commission has received comments stating that
entities that trade crypto asset securities may incur different
compliance costs than entities that trade traditional securities. One
commenter states that the analysis provided in the Proposing Release
were based only on ``traditional broker-dealer business,'' adding that
they were not aware of any broker-dealers that had successfully
registered under the Commission's framework for registering ``digital-
asset-only broker-dealers.'' \269\ There are also costs that are unique
to New Rule 3b-16(a) Systems that trade crypto asset securities. These
costs are also the result of the use of different technology and
methods of operation in some instances. These costs are discussed in
the sections below as applicable. The Commission invites comment on the
costs of the Proposed Rules for market participants in the market for
crypto asset securities.
---------------------------------------------------------------------------

    \269\ See ADAM Letter II at 14.
---------------------------------------------------------------------------

a. Compliance Costs
    Table V.1 provides estimates for the aggregate compliance costs for
New Rule 3b-16(a) Systems that trade crypto asset securities. These
aggregate costs reflect an estimate of 20 additional affected New Rule
3b-16(a) Systems that were not included in the estimates provided in
the Proposing Release, which is the upper end of the Commission's
estimate of the number of affected systems. The Commission is uncertain
as to how precise these estimates are because we lack sufficient data
on crypto asset securities.\270\
---------------------------------------------------------------------------

    \270\ See supra section V.B.1.
---------------------------------------------------------------------------

    In both Table V.1 and the following subsections, the Commission is
relying on the analysis in the Proposing Release to form the basis for
its discussion of costs. The Commission preliminarily believes that
actual costs may be higher than these estimates and discussions
express, due to the type of technology and operations utilized in
trading crypto asset securities. Because it lacks certain data, the
Commission is unable to provide an estimate as to how much higher costs
may be, but preliminarily believes that these estimates and discussions
provide a useful lower bound.

   Table V.1--Total Implementation Costs and Other Compliance Costs Affecting Entities That Trade Crypto Asset
                                Securities Not Included in the Proposing Release
----------------------------------------------------------------------------------------------------------------
                                                                                Aggregate       Aggregate
                    Rule                              Compliance action            initial costs   ongoing costs
----------------------------------------------------------------------------------------------------------------
Reg ATS, 301(b)(1).........................  Form BD filing.....................     \a\ $18,000      \d\ $6,000
                                             Form ID filing.....................       \b\ 1,000  ..............
                                             Other compliance costs (non-PRA       \c\ 6,320,000   \e\ 1,154,000
                                              based).
Reg ATS, 301(b)(2).........................  Form ATS filing....................     \f\ 128,000      \g\ 30,000
Reg ATS, 301(b)(9).........................  Form ATS-R filing..................  ..............     \h\ 130,000
Reg ATS, 301(b)(10)........................  Written safeguards and procedures        \i\ 64,000      \j\ 20,000
                                              to protect subscribers'
                                              confidential trading information.
Reg ATS, 302...............................  Recordkeeping......................  ..............      \k\ 68,000
Reg ATS, 303...............................  Record preservation................  ..............       \l\ 2,000
                                                                                -------------------------------
    Total..................................  ...................................       6,531,000       1,410,000
----------------------------------------------------------------------------------------------------------------
\a\ This cost figure is obtained by summing the initial implementation costs of Rule 301(b)(1)'s Form BD filing
  requirement for 20 New Rule 3b-16(a) Systems that trade crypto asset securities not included in the Proposing
  Release. See Proposing Release at Table VIII.8.
\b\ This cost figure is obtained by summing the initial implementation costs of Rule 301(b)(1)'s Form ID filing
  requirement for 20 New Rule 3b-16(a) Systems that trade crypto asset securities not included in the Proposing
  Release. See Proposing Release at Table VIII.8.
\c\ This cost figure is obtained by summing the other initial implementation costs (non-PRA based) associated
  with Rule 301(b)(1) for 20 New Rule 3b-16(a) Systems that trade crypto asset securities not included in the
  Proposing Release. See Proposing Release at Table VIII.8.
\d\ This cost figure is obtained by summing the ongoing implementation costs of Rule 301(b)(1)'s Form BD filing
  requirement for 20 New Rule 3b-16(a) Systems that trade crypto asset securities not included in the Proposing
  Release. See Proposing Release at Table VIII.8.
\e\ This cost figure is obtained by summing the other ongoing implementation costs (non-PRA based) for 20 New
  Rule 3b-16(a) Systems that trade crypto asset securities not included in the Proposing Release. See Proposing
  Release at Table VIII.8.
\f\ This cost figure is obtained by summing the initial implementation costs of Rule 301(b)(2)'s Form ATS filing
  requirement for 20 New Rule 3b-16(a) Systems that trade crypto asset securities not included in the Proposing
  Release. See Proposing Release at Table VIII.8.

\g\ This cost figure is obtained by summing the ongoing implementation costs of Rule 301(b)(2)'s Form ATS filing
  requirement for 20 New Rule 3b-16(a) Systems that trade crypto asset securities not included in the Proposing
  Release. See Proposing Release at Table VIII.8.
\h\ This cost figure is obtained by summing the ongoing implementation costs of Rule 301(b)(9)'s Form ATS-R
  filing requirement for 20 New Rule 3b-16(a) Systems that trade crypto asset securities not included in the
  Proposing Release. See Proposing Release at Table VIII.8.
\i\ This cost figure is obtained by summing the initial implementation costs of Rule 301(b)(10)'s requirement
  for written safeguards and procedures to protect subscribers' confidential trading information, for 20 New
  Rule 3b-16(a) Systems that trade crypto asset securities not included in the Proposing Release. See Proposing
  Release at Table VIII.8.
\j\ This cost figure is obtained by summing the ongoing implementation costs of Rule 301(b)(10)'s requirement
  for written safeguards and procedures to protect subscribers' confidential trading information, for 20 New
  Rule 3b-16(a) Systems that trade crypto asset securities not included in the Proposing Release. See Proposing
  Release at Table VIII.8.
\k\ This cost figure is obtained by summing the ongoing implementation costs of Rule 302's recordkeeping
  requirement for 20 New Rule 3b-16(a) Systems that trade crypto asset securities not included in the Proposing
  Release. See Proposing Release at Table VIII.8.
\l\ This cost figure is obtained by summing the ongoing implementation costs of Rule 303's record preservation
  requirement for 20 New Rule 3b-16(a) Systems that trade crypto asset securities not included in the Proposing
  Release. See Proposing Release at Table VIII.8.

    Commenters express concern that the Proposed Rules would include
certain crypto asset security entities that the Commission had not
considered, which would increase costs beyond what was estimated in the
Proposing Release due to the increase in the number of affected
entities.\271\ The Commission is now including a rough estimate that
the Proposed Rules would include 15-20 New Rule 3b-16(a) Systems that
trade crypto securities that were not included in the Proposing
Release,\272\ along with the associated costs.
---------------------------------------------------------------------------

    \271\ See DeFi Education Fund Letter at 9, 17; Crypto Council
Letter at 5; Blockchain Association Letter II at 7; LeXpunK Letter
at 11; Chamber Letter at 5.
    \272\ See supra section V.B.1.c (discussing New Rule 3b-16(a)
Systems in the market for crypto asset securities, and the
Commission's uncertainty regarding this estimate).
---------------------------------------------------------------------------

    One commenter expresses concern that ``persons who may merely write
open-source `communications protocol' code or publish information about
the contents of communications systems which they do not control''
would be included by the amended definition of exchange.\273\ Another
commenter expresses similar concerns that ``DeFi developers'' would be
included by the amended definition of exchange.\274\ Another commenter
expresses similar concerns that ``persons who `make available' AMMs or
interfaces for utilizing AMMs may now be required by the SEC to
register those AMMs as ATSs or securities exchanges.'' \275\ Another
commenter expresses concern that the definition of exchange, as
proposed to be amended, might ``capture developers working with all
manner of protocols, front end systems, and smart contracts.'' \276\
Two commenters include smart contract code developers and publishers,
blockchain miners and validators, providers of liquidity to AMMs,
website maintainers, and blockchain client software developers as
examples of persons they believe might be inadvertently captured by the
definition of exchange, as proposed to be amended.\277\ Another
commenter lists social networking websites, peer-to-peer messaging
applications, business communication platforms, financial information
systems, blockchain technology nodes, and smart contracting platforms
as examples of common retail communication platforms that might be
required to register as an exchange under the Proposed Rules, adding
that the proposal was likely to make ``everyone involved in any
securities-related communications an exchange or ATS.'' \278\ Another
commenter states that ``any broker-dealer or non-broker-dealer that has
systems related to trading or communicating trading interest in
securities'' might be included by the Proposed Rules.\279\ This
commenter also lists validators, developers of smart contracts, and
website operators as examples of entities that might be included by the
Proposed Rules.\280\ Another commenter states that the Proposed Rules
might cause ``developers of code and smart contracts related to a
Decentralized Protocol, or the maintainers of online websites that
merely enable access to a Decentralized Protocol'' to be captured by
the definition of exchange, as proposed to be amended.\281\
---------------------------------------------------------------------------

    \273\ See Delphi Digital Letter at 6.
    \274\ See DeFi Education Fund Letter at 3, 9.
    \275\ See Letter from Murray B. Wells, Attorney/Partner, Wells
Associates, PLLC, dated Apr. 18, 2022 (``Wells Letter'') at 2.
    \276\ See LeXpunK Letter at 13.
    \277\ See Wells Letter at 2; LeXpunK Letter at 14.
    \278\ See DARLA, GBC, and Global DCA Letter at 7.
    \279\ See a16z Letter at 7.
    \280\ See id. at 14.
    \281\ See Blockchain Association Letter II at 6.
---------------------------------------------------------------------------

    The Commission believes that the entities these commenters describe
would only be an exchange if they constitute, maintain, or provide a
market place or facility that meets the applicable criteria, and would
only incur compliance costs in connection with their activities that
constitute, maintain, or provide that market place or facility.
    The Commission acknowledges that there may be circumstances in
which the miners or validators of a blockchain could incur costs under
the Proposed Rules, and the Commission solicits comment on any such
costs.\282\
---------------------------------------------------------------------------

    \282\ See supra notes 75-80 and accompanying text, section II.B
(discussing groups of persons under the definition of exchange);
infra section V.C.2.c.i.
---------------------------------------------------------------------------

i. Implementation Costs
    New Rule 3b-16(a) Systems that would be newly subject to the
requirements of Regulation ATS would incur implementation costs
associated with, among other things, written safeguards and procedures
to protect subscribers' confidential trading information,
recordkeeping, record preservation, and Form ATS-R.\283\ The Commission
estimates that there are 15-20 additional New Rule 3b-16(a) Systems not
included in the Proposing Release that trade crypto asset
securities.\284\
---------------------------------------------------------------------------

    \283\ See id. at 15627.
    \284\ See supra section V.B.1.c (discussing New Rule 3b-16(a)
Systems in the market for crypto asset securities, and the
Commission's uncertainty regarding this estimate).
---------------------------------------------------------------------------

    Furthermore, New Rule 3b-16(a) Systems that trade NMS stocks would
incur higher implementation costs due to the heightened requirements of
filing Form ATS-N compared to New Rule 3b-16(a) Systems that would file
Form ATS.\285\ To the extent that any crypto asset securities are NMS
stocks, New Rule 3b-16(a) Systems that trade them would incur these
higher costs. The Commission estimates that no \286\ New Rule 3b-16(a)
Systems currently trade crypto asset securities that are NMS stocks.
---------------------------------------------------------------------------

    \285\ See id.
    \286\ The Commission is uncertain as to the accuracy of this
estimate because we lack sufficient data on the full set of
securities traded in crypto asset markets. See supra section V.B.1.
---------------------------------------------------------------------------

    Current ATSs and New Rule 3b-16(a) Systems that trade neither NMS
stocks nor government securities would incur implementation costs
associated with re-filing or filing the modernized Form ATS.
Furthermore, all New Rule 3b-16(a) Systems would incur implementation
costs to file the revised electronic Form ATS-R. Current NMS Stock ATSs
would incur implementation costs associated with amending revised Form
ATS-N. The

Commission estimates that 15-20 \287\ New Rule 3b-16(a) Systems
currently trade crypto asset securities that are not NMS stocks that
were not included in the Proposing Release, and no \288\ New Rule 3b-
16(a) Systems currently trade crypto asset securities that are NMS
stocks. To the extent that a current ATS or New Rule 3b-16(a) System
trades in crypto asset securities generally or crypto asset NMS stock
specifically, associated costs described in the Proposing Release would
be a lower bound on costs incurred.\289\
---------------------------------------------------------------------------

    \287\ See supra section V.B.1.c (discussing New Rule 3b-16(a)
Systems in the market for crypto asset securities, and the
Commission's uncertainty regarding this estimate).
    \288\ The Commission is uncertain as to the accuracy of this
estimate because we lack sufficient data on the full set of
securities traded in crypto asset markets. See supra section V.B.1.
    \289\ See id.; Table VIII.8.
---------------------------------------------------------------------------

    Significant NMS Stock ATSs and ATSs that trade corporate debt
securities, municipal securities, or equity securities that are not NMS
stocks are subject to the Fair Access Rule. The Commission estimates
that no \290\ New Rule 3b-16(a) Systems that trade crypto asset
corporate debt securities, municipal securities, NMS stocks, or equity
securities that are not NMS stocks would be subject to the Fair Access
Rule.
---------------------------------------------------------------------------

    \290\ The Commission is uncertain as to the accuracy of this
estimate because we lack sufficient data on the full set of
securities traded in crypto asset markets. See supra section V.B.1.
---------------------------------------------------------------------------

    Significant ATSs that trade corporate debt securities or municipal
securities are subject to Rule 301(b)(6). The Commission estimates that
no \291\ New Rule 3b-16(a) Systems currently trade corporate debt or
municipal securities that are crypto asset securities and would meet
the threshold of Rule 301(b)(6). To the extent that such an entity
exists, the Commission believes that the implementation costs per
entity presented in the Proposing Release would be a lower bound on
costs incurred.\292\
---------------------------------------------------------------------------

    \291\ The Commission is uncertain as to the accuracy of this
estimate because we lack sufficient data on the full set of
securities traded in crypto asset markets. See supra section V.B.1.
    \292\ See id.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission discussed estimates of
initial PRA burdens for new SCI entities and ongoing PRA burdens for
all SCI entities.\293\ To the extent that any significant New Rule 3b-
16(a) System trades in crypto asset securities that are (i) NMS stocks
or (ii) equity securities that are not NMS stocks, and would therefore
be subject to Regulation SCI, the Commission preliminarily believes
that the PRA burdens discussed in the Proposing Release would be a
lower bound on costs incurred. The Commission estimates that no \294\
New Rule 3b-16(a) Systems that trade crypto asset securities that are
NMS stocks or equity securities that are not NMS stocks would meet the
applicable thresholds to be subject to Regulation SCI.
---------------------------------------------------------------------------

    \293\ See id.
    \294\ The Commission is uncertain as to the accuracy of this
estimate because we lack sufficient data on the full set of
securities traded in crypto asset markets. See supra section V.B.1.
---------------------------------------------------------------------------

    As discussed in the Proposing Release,\295\ the Commission believes
that the fixed implementation costs associated with Rule 301(b)(9) and
(10), Rule 302, and Rule 303 would represent a larger fraction of
revenue for a small (measured in trading volume) ATS relative to that
for a large ATS. To the extent that New Rule 3b-16(a) Systems trade
crypto asset securities, and are therefore subject to these costs, the
Commission expects the fixed costs to fall disproportionately on such
lower-volume New Rule 3b-16(a) Systems.
---------------------------------------------------------------------------

    \295\ See Proposing Release at 15628.
---------------------------------------------------------------------------

    As discussed in the Proposing Release,\296\ the Commission believes
that the fixed implementation costs of developing internal processes to
ensure correct and complete reporting on Form ATS-N would represent a
larger fraction of revenue for a small (measured in trading volume) ATS
relative to that for a large ATS. To the extent that New Rule 3b-16(a)
Systems trade crypto assets that are NMS stocks, and are therefore
subject to these costs, the Commission expects the fixed costs to fall
disproportionately on smaller such New Rule 3b-16(a) Systems. However,
as in the Proposing Release, the Commission expects that smaller New
Rule 3b-16(a) Systems that are not operated by multi-service broker-
dealer operators and that generally do not engage in other brokerage or
dealing activities in addition to their ATSs would likely incur lower
implementation costs, because certain sections of Form ATS-N, as
proposed to be amended, would not be applicable to these New Rule 3b-
16(a) Systems.
---------------------------------------------------------------------------

    \296\ See id.
---------------------------------------------------------------------------

    The Commission also believes that the implementation costs
associated with Rule 304 would vary across New Rule 3b-16(a) Systems
that are NMS Stock ATSs depending on the complexity of the ATS and the
services that it offers. As discussed in the Proposing Release, the
Commission believes that less complex ATSs and ATSs that offer fewer
services would incur lower implementation costs due to requiring fewer
burden hours to complete their Forms ATS-N.\297\ The Commission
estimates that no \298\ New Rule 3b-16(a) Systems currently trade
crypto assets that are NMS stocks. To the extent that any such New Rule
3b-16(a) System exists, the Commission believes that this would also be
the case for such systems.
---------------------------------------------------------------------------

    \297\ See id. at 15628.
    \298\ The Commission is uncertain as to the accuracy of this
estimate because we lack sufficient data on the full set of
securities traded in crypto asset markets. See supra section V.B.1.
---------------------------------------------------------------------------

ii. Costs Associated With Broker-Dealer Requirements
    Under proposed Rule 301(b)(1), New Rule 3b-16(a) Systems that are
non-broker-dealers (i.e., non-broker-dealer-operated New Rule 3b-16(a)
Systems) and trade crypto assets securities would be subject to broker-
dealer registration requirements. Such an entity would incur costs
associated with broker-dealer registration, which include costs related
to registering with the Commission as broker-dealers, becoming members
of an SRO, maintaining broker-dealer registration and SRO membership,
and certain broker-dealer requirements with respect to maintaining net
capital, reporting, and recordkeeping. The Commission estimates that
roughly 15-20 \299\ such New Rule 3b-16(a) Systems that trade crypto
asset securities not included in the Proposing Release exist. The
Commission believes that the costs \300\ discussed in the Proposing
Release \301\ for such entities would be a lower bound on the costs
incurred.
---------------------------------------------------------------------------

    \299\ See supra section V.B.1.c (discussing New Rule 3b-16(a)
Systems in the market for crypto asset securities, and the
Commission's uncertainty regarding this estimate).
    \300\ As stated in the Proposing Release, the Commission lacks
information that would allow it to provide estimates on certain
restructuring related costs for a non-broker-dealer-operated
Communication Protocol System that trades crypto asset securities.
Likewise, the Commission is unable to estimate the costs of broker-
dealer requirements with respect to maintaining net capital,
reporting, and recordkeeping, as it lacks information on how
affected entities might change their current business structures
upon registering as a broker-dealer.
    \301\ See Proposing Release at 15628-29.
---------------------------------------------------------------------------

    Furthermore, under section 4(a)(4) of the Securities Act,\302\ a
broker-dealer is required to conduct a reasonable inquiry into the
facts surrounding the proposed sale of a security by its customer to
determine whether the sale of the security would violate section 5,
such as if there is no registration statement in effect with the
Commission as to the offer and sale of the security, or there is no
applicable exemption from the registration provisions available to the
customer. Upon registration as a broker-dealer, an entity could face
liability under section 5 of the Securities Act for

facilitating sales of securities on behalf of its customers that would
violate section 5. To the extent a substantial portion of this entity's
business is in the sales of such securities, the Proposed Rules would
result in a significant loss in revenue for the entity.
---------------------------------------------------------------------------

    \302\ See 15 U.S.C. 77d(a)(4).
---------------------------------------------------------------------------

    One commenter states that the Commission's estimates of compliance
costs, provided in the Proposing Release, omitted the costs of joining
FINRA, which is a requirement for becoming a registered broker-
dealer.\303\ The commenter characterizes these costs as representing
``the lion's share'' of the time and effort needed to become a broker-
dealer. The Commission did discuss these costs in the Proposing
Release,\304\ and believes that the estimates provided there provide a
useful characterization, notwithstanding the possibility that some
costs may be higher for entities that trade crypto asset
securities.\305\
---------------------------------------------------------------------------

    \303\ See Crypto Council Letter at 6.
    \304\ See Proposing Release at Table VIII.8 and note 1120.
    \305\ See supra section V.C.2.a.
---------------------------------------------------------------------------

    The Commission believes that a New Rule 3b-16(a) System not
operated by a broker-dealer would not incur compliance costs associated
with registering as a broker-dealer and becoming a member of an SRO
(e.g., FINRA) if it has a broker-dealer affiliate.\306\ The Commission
believes that this would also apply to a New Rule 3b-16(a) System that
trades crypto asset securities. A broker-dealer affiliate that is
adding ATS or New Rule 3b-16(a) System operations would incur
additional ongoing costs associated with maintaining FINRA membership
if adding trading operations increases revenue, the number of
registered persons or branch offices, trading volume, or expands the
scope of brokerage activities. Furthermore, a broker-dealer affiliate
that is adding ATS or New Rule 3b-16(a) System operations could incur
additional costs associated with maintaining adequate net capital
level, reporting, and recordkeeping depending on the changes in
business structure of the broker-dealer. As in the Proposing
Release,\307\ the Commission is unable to provide estimates on these
additional costs; however, the Commission estimates that there are no
\308\ New Rule 3b-16(a) Systems not operated by a broker-dealer that
are affiliated with an existing broker-dealer.
---------------------------------------------------------------------------

    \306\ See Proposing Release at 15629.
    \307\ See id. at 15629.
    \308\ The Commission is uncertain as to the accuracy of this
estimate because we lack sufficient data on the full set of
securities traded in crypto asset markets. See supra section V.B.1.
---------------------------------------------------------------------------

iii. Costs Associated With the Ineffectiveness Declaration
    In addition to the implementation costs associated with filing and
amending Form ATS-N, the Commission preliminarily believes that the
proposed ability for the Commission to declare an initial Form ATS-N or
Form ATS-N amendment ineffective could result in direct costs for New
Rule 3b-16(a) Systems that are NMS Stock ATSs.\309\ However, the
Commission estimates that no \310\ New Rule 3b-16(a) Systems currently
trade crypto asset securities that are NMS stocks. To the extent that
such a New Rule 3b-16(a) System exists, it would incur these costs.
However, the Commission believes that there would not be a substantial
burden imposed in connection with resubmitting an initial Form ATS-N or
a Form ATS-N amendment or from an ineffective declaration in
general.\311\ The costs of an ineffectiveness declaration would
encourage New Rule 3b-16(a) Systems trading in these crypto asset
securities to initially submit a more accurate and complete Form ATS-N
and amendments thereto, which would reduce the likelihood that they are
declared ineffective.\312\ Additionally, New Rule 3b-16(a) Systems that
trade NMS stocks, including those that are crypto asset securities,
would also be able to continue operations pending the Commission's
review of their initial Form ATS-N. However, if after notice and
opportunity for hearing, the Commission declares an initial Form ATS-N
filed by such a New Rule 3b-16(a) System ineffective, the ATS would be
required to cease operations until an initial Form ATS-N is effective.
---------------------------------------------------------------------------

    \309\ See id.
    \310\ The Commission is uncertain as to the accuracy of this
estimate because we lack sufficient data on the full set of
securities traded in crypto asset markets. See supra section V.B.1.
    \311\ See Proposing Release at 15630 (citation omitted).
    \312\ See id.
---------------------------------------------------------------------------

iv. Costs Associated With the Fair Access Rule
    The Commission preliminarily believes that complying with the Fair
Access Rule could result in compliance costs (non-PRA based) for New
Rule 3b-16(a) Systems that trade NMS stocks (including NMS Stock ATSs
that would no longer be excluded from Fair Access compliance under Rule
301(b)(5)(iii) as proposed),\313\ equity securities that are not NMS
stocks, corporate debt securities, or municipal securities.\314\ If a
New Rule 3b-16(a) System must change fee structures, order interaction
procedures, trading protocols, or access provisions and adapt their
operating model due to the Fair Access Rule, it would incur costs
related to changing business operations.\315\ To the extent that a New
Rule 3b-16(a) System trades in crypto asset securities that fall into
any of the above-mentioned categories, the Commission believes that it
would incur costs related to these changes as described in the
Proposing Release. As in the Proposing Release, the Commission lacks
data that would be used to quantify the costs related to these changes.
The Commission estimates that no \316\ New Rule 3b-16(a) Systems
currently trade crypto asset securities that are NMS stocks, equities
that are not NMS Stocks, corporate debt, or municipal securities.
---------------------------------------------------------------------------

    \313\ Today, based on public Form ATS-N filings, no NMS Stock
ATS operates pursuant to this exclusion.
    \314\ See id.
    \315\ See id.
    \316\ The Commission is uncertain as to the accuracy of this
estimate because we lack sufficient data on the full set of
securities traded in crypto asset markets. See supra section V.B.1.
---------------------------------------------------------------------------

    As discussed in the Proposing Release,\317\ the Proposed Rules
would aggregate volume across affiliated ATSs in calculating the fair
access volume thresholds. This would mean affiliate ATSs that otherwise
do not meet the relevant volume thresholds may be subject to the Fair
Access Rule. As discussed above, if ATSs must adapt their operating
models as a result of being subject to the Fair Access Rule, those ATSs
would incur costs related to changing business operations. The
Commission estimates that no current affiliate ATS that trades NMS
stocks, equity securities that are not NMS stocks, corporate debt
securities, or municipal securities, that are crypto asset securities,
and does not already currently meet the fair access volume thresholds
would meet the thresholds if volume is aggregated across affiliated
ATSs.
---------------------------------------------------------------------------

    \317\ See Proposing Release at 15630-31.
---------------------------------------------------------------------------

v. Costs Associated With Rule 301(b)(6)
    As discussed in the Proposing Release,\318\ in addition to the
implementation costs associated with reporting outages and
recordkeeping under the proposed Rule 301(b)(6), the Commission
preliminarily believes that significant New Rule 3b-16(a) Systems that
trade corporate debt securities or municipal securities could incur
compliance costs (non-PRA based) to ensure adequate capacity,
integrity, and security with respect to those systems

that support order entry, order routing, order execution, transaction
reporting, and trade comparison. To the extent that a New Rule 3b-16(a)
System trades in crypto assets that are corporate debt securities or
municipal securities, and does not currently meet the standards under
the proposed rule, they would incur compliance costs as described in
the Proposing Release. The Commission lacks information that would
enable it to reasonably estimate these costs, but believes that the
compliance costs associated with Rule 301(b)(6) would be significantly
less than those of Regulation SCI.\319\ Furthermore, the Commission
estimates that none \320\ of the New Rule 3b-16(a) Systems trading
crypto asset securities would meet the applicable volume requirements
and be subject to the requirements of Rule 301(b)(6).
---------------------------------------------------------------------------

    \318\ See id. at 15631.
    \319\ See id. at 15631 n.1138 and accompanying text.
    \320\ The Commission is uncertain as to the accuracy of this
estimate because we lack sufficient data on the full set of
securities traded in crypto asset markets. See supra section V.B.1.
---------------------------------------------------------------------------

vi. Costs Associated With Regulation SCI
    New Rule 3b-16(a) Systems that meet certain volume thresholds and
trade crypto asset securities that are (i) NMS stock or (ii) equity
securities that are not NMS stocks, would incur compliance costs (non-
PRA based costs) as SCI entities, including both initial and ongoing
costs. The Commission believes that, to the extent that there exist New
Rule 3b-16(a) Systems trading crypto asset securities that are equity
securities, including NMS stocks, the costs described in the Proposing
Release \321\ would be a lower bound on cost incurred. The Commission
estimates no \322\ New Rule 3b-16(a) Systems that trade crypto asset
securities would be subject to Regulation SCI.
---------------------------------------------------------------------------

    \321\ See id.; section VIII.C.2.a.vi.
    \322\ The Commission is uncertain as to the accuracy of this
estimate because we lack sufficient data on the full set of
securities traded in crypto asset markets. See supra section V.B.1.
See also Securities Exchange Act Release No. 97143 (Mar. 15, 2023),
available at https://www.sec.gov/rules/proposed/2023/34-97143.pdf.
The Commission encourages commenters to review that Regulation SCI
proposal to determine whether it might affect their comments on this
Reopening Release.
---------------------------------------------------------------------------

    The Commission also believes that some New Rule 3b-16(a) Systems'
participants required to participate in the testing of business
continuity and disaster recovery plans would incur Regulation SCI-
related connectivity costs. The Commission believes that $10,000 apiece
would be a lower bound on such costs.\323\ However, because the
Commission estimates that no New Rule 3b-16(a) Systems that trade
crypto asset securities would be subject to Regulation SCI, no such
participants would incur these costs.
---------------------------------------------------------------------------

    \323\ See id.
---------------------------------------------------------------------------

    The Commission believes that the costs to comply with Regulation
SCI discussed above would also fall on third-party vendors employed by
New Rule 3b-16(a) Systems to provide services used in their SCI
systems.\324\ To the extent that a vendor provides services to an ATS
that trades crypto asset securities that are equity securities,
including NMS stocks, it would incur these costs. However, because the
Commission estimates that no New Rule 3b-16(a) Systems that trade
crypto asset securities would be subject to Regulation SCI, no such
vendors would incur these costs.
---------------------------------------------------------------------------

    \324\ See id. at 15632.
---------------------------------------------------------------------------

b. Indirect Costs
    The Commission believes that the Proposed Rules could result in
indirect costs for market participants and certain New Rule 3b-16(a)
Systems that trade crypto asset securities.\325\
---------------------------------------------------------------------------

    \325\ See infra section V.C.3 for discussions about the economic
effects of the Proposed Rules specifically pertaining to
competition, efficiency, and capital formation.
---------------------------------------------------------------------------

i. General Indirect Costs
    In the following discussion, the Commission is relying on the
analysis in the Proposing Release to form the basis for our discussion
of these costs. The Commission preliminarily believes that actual costs
may be higher than these discussions express, due to the technology and
operations utilized in trading crypto asset securities. The Commission
is unable to provide a discussion as to how much higher costs may be,
but preliminarily believes that the discussions below provide a useful
lower bound.
    The public disclosure requirements of Form ATS-N under the proposal
could generate indirect costs for some subscribers by causing New Rule
3b-16(a) Systems that trade NMS stock to stop sharing information that
they might currently offer to only some subscribers.\326\ Form ATS-N
would require NMS Stock ATSs to publicly disclose any platform-wide
order execution metrics that they share with any subscriber. To avoid
publicly disclosing this information, an ATS might stop sharing the
information with subscribers. The trading costs of subscribers that
currently use this information to help make trading decisions would
likely increase if the information is no longer available to them. To
the extent that a subscriber trades using a New Rule 3b-16(a) System
that trades crypto assets that are NMS stocks and receives such
information, the subscriber would incur these indirect costs. As
discussed in the Proposing Release, the Commission anticipates that
this risk might be low due to commercial incentives that may induce
ATSs to continue disclosing this information.\327\
---------------------------------------------------------------------------

    \326\ See id.
    \327\ See id.
---------------------------------------------------------------------------

    The Commission believes that the public disclosure of Form ATS-N
would generate indirect costs, in the form of transfers, for some
subscribers of New Rule 3b-16(a) Systems that trade NMS stock who might
currently have more information regarding some ATS features, such as
order priority and matching procedures, than other subscribers.\328\
The public disclosure of these features would reduce informed
subscribers' information advantage over other subscribers on such New
Rule 3b-16(a) Systems and increase their trading costs. In this regard,
the Commission recognizes that this effect would be a transfer to those
subscribers who would receive the proposed information, from those
subscribers who currently exclusively receive such information. To the
extent that a New Rule 3b-16(a) System trades in crypto asset
securities that are NMS stocks, such transfers might occur among their
subscribers.
---------------------------------------------------------------------------

    \328\ See id.
---------------------------------------------------------------------------

    Some New Rule 3b-16(a) Systems that trade NMS stock would
experience indirect costs from the public disclosure of Form ATS-N to
the extent that this form would reveal information to competitors.\329\
If such a New Rule 3b-16(a) System in part relies on certain
operational characteristics (e.g., order types, trading
functionalities) to attract customer order flow and generate trading
revenues, it is possible that the public disclosure of these
characteristics in Form ATS-N would make it easier for other trading
venues to adopt the operational characteristics, which would lower
trading volume and reduce revenue of the disclosing New Rule 3b-16(a)
System. Such costs to the disclosing entity would constitute transfers
to competing ATSs rather than a net cost to the market. To the extent
that a New Rule 3b-16(a) System trades any crypto assets that are NMS
stocks, it might experience these transfers described in the Proposing
Release. Furthermore, because some New Rule 3b-16(a) Systems involve
systems which run with an on-chain

component,\330\ and therefore may operate using code that is, at least
in part, publicly viewable, it is possible that the adverse impact of
these disclosures may be reduced, for such systems. However, because
this code is not disclosed in a standardized or human-readable form,
the Commission believes that this reduction of impact may not be
significant.
---------------------------------------------------------------------------

    \329\ See id.
    \330\ For example, the system may be run in part by smart
contracts deployed on a blockchain. See supra section V.B.1.a for
additional discussion of such systems.
---------------------------------------------------------------------------

    The Commission believes that the risk of these transfers is low
because it is not likely the responsive information to Form ATS-N, as
proposed to be amended, would include detailed enough information
regarding operational facets such that the public disclosure of the
information would allow another ATS to replicate the functionality to
the extent it would adversely affect the competitive position of the
disclosing ATS in the market.\331\
---------------------------------------------------------------------------

    \331\ See id.
---------------------------------------------------------------------------

    The Commission believes that New Rule 3b-16(a) Systems that trade
NMS stocks (including NMS Stock ATSs that would no longer be excluded
from Fair Access compliance under Rule 301(b)(5)(iii) as proposed),
equity securities that are not NMS stocks, corporate debt securities,
or municipal securities could indirectly experience costs in the form
of lost revenue if they meet or exceed the Fair Access Rule thresholds
and need to alter their business model to comply with the requirements
of the Fair Access Rule.\332\ To the extent that any crypto asset
securities fall into these categories, the Commission believes that a
New Rule 3b-16(a) System that trades in them, including NMS Stock ATSs
that trade crypto asset securities that are NMS stocks and would no
longer be excluded from Fair Access compliance under Rule
301(b)(5)(iii) as proposed, might incur these costs discussed in the
Proposing Release.
---------------------------------------------------------------------------

    \332\ See id.
---------------------------------------------------------------------------

    As discussed in the Proposing Release,\333\ the Commission believes
that market participants could incur indirect costs related to New Rule
3b-16(a) Systems that trade NMS stocks (including NMS Stock ATSs that
would no longer be excluded from Fair Access compliance under Rule
301(b)(5)(iii) as proposed), equity securities that are not NMS stocks,
corporate debt securities, or municipal securities, being subject to
the Fair Access Rule. To the extent that a New Rule 3b-16(a) System
(including NMS Stock ATSs that would no longer be excluded from Fair
Access compliance under Rule 301(b)(5)(iii) as proposed) trades in
crypto assets that fall into any of the above categories of security,
market participants that trade on such platforms might experience
transfer costs through the same chain of events described in the
Proposing Release.
---------------------------------------------------------------------------

    \333\ See Proposing Release at 15633.
---------------------------------------------------------------------------

    Compared to larger and more established New Rule 3b-16(a) Systems
trading in crypto assets, it is possible that younger New Rule 3b-16(a)
Systems rely more on providing catered services, including more
advantageous access, to specific clients or a clientele, in order to
grow their businesses.\334\ If being subject to the Fair Access Rule
prohibits these New Rule 3b-16(a) Systems from doing this, these New
Rule 3b-16(a) Systems could restrict trading on their systems when they
are close to meeting the volume thresholds under the Fair Access
Rule.\335\ As in the Proposing Release, to the extent that the market
for trading services is competitive, the Commission believes this may
not result in a significant increase in trading costs for market
participants, because the order flow that was being sent to those New
Rule 3b-16(a) Systems would likely be absorbed and redistributed
amongst other New Rule 3b-16(a) Systems or other venues.\336\ However,
if a New Rule 3b-16(a) System that is the sole provider of a niche
service limits the trading in certain securities to avoid being subject
to the Fair Access Rule, it could be more difficult for some market
participants to find an alternative trading venue for that niche
service, which would result in a larger increase in trading costs.\337\
To the extent that a New Rule 3b-16(a) System trades in crypto assets
that are securities, the Commission expects these costs to apply to
such a New Rule 3b-16(a) System as described in the Proposing Release.
---------------------------------------------------------------------------

    \334\ Id.
    \335\ Id.
    \336\ Id.
    \337\ Id.
---------------------------------------------------------------------------

    As discussed in the Proposing Release,\338\ the Proposed Rules
apply certain aggregate volume thresholds to the Fair Access Rule in
the markets for corporate debt and municipal securities and equity
securities, which could also cause market participants to incur similar
indirect costs. If the aggregate volume of ATSs operated by a common
broker-dealer or operated by affiliated broker-dealers approaches the
Fair Access volume thresholds, then the operators could restrict
trading in one or more securities on their systems in order to avoid
being subject to the requirements of the Fair Access Rule.\339\ Market
participants could also incur indirect costs from the Proposed Rules to
apply certain aggregate volume thresholds to the Fair Access Rule if it
causes a broker-dealer or affiliated broker-dealers that operate
multiple ATSs to shut down one or more of their smaller ATSs in order
to avoid triggering the Fair Access threshold.\340\ This could cause
market participants that subscribed to one of the shutdown platforms to
incur search costs to find another venue to trade on.\341\ To the
extent that there exist crypto assets that fall into one of the above
asset classes, and are traded on ATSs, the Commission believes that
these indirect costs could apply as discussed in the Proposing Release.
---------------------------------------------------------------------------

    \338\ Id.
    \339\ Id.
    \340\ Id.
    \341\ Id.
---------------------------------------------------------------------------

    As discussed in the Proposing Release,\342\ the Commission believes
that market participants could incur indirect costs related to applying
Regulation SCI to New Rule 3b-16(a) Systems in the market for crypto
asset equity securities and applying Rule 301(b)(6) to New Rule 3b-
16(a) Systems in the market for crypto asset corporate debt securities
or municipal securities. If such a New Rule 3b-16(a) System is close to
satisfying the volume thresholds of Regulation SCI or Rule 301(b)(6),
it could limit the trading in certain securities on its systems to stay
below the volume thresholds in order to avoid being subject to
Regulation SCI or Rule 301(b)(6).\343\ As discussed above, the
Commission believes that in general this would not necessarily lead to
higher trading costs, but to the extent this occurs for a New Rule 3b-
16(a) System that is the sole provider of a niche service, some market
participants would incur higher trading costs.
---------------------------------------------------------------------------

    \342\ Id.
    \343\ Id.
---------------------------------------------------------------------------

    Additionally, in order to stay below the volume thresholds under
Regulation SCI or Rule 301(b)(6), a New Rule 3b-16(a) System could
break itself up into smaller New Rule 3b-16(a) Systems.\344\ If this
results in its subscribers changing their administrative and
operational procedures (e.g., means of access, connectivity, order
entry), the subscribers would incur costs associated with making those
administrative and operational changes to utilize the ATS(s), or
otherwise incur search costs to find another venue to trade.\345\ To
the extent that there exist crypto assets that fall into one of the
applicable asset

classes, and are traded on New Rule 3b-16(a) Systems, the Commission
believes that these costs could apply as discussed in the Proposing
Release.\346\
---------------------------------------------------------------------------

    \344\ Id.
    \345\ Id.
    \346\ See id.
---------------------------------------------------------------------------

ii. Costs Associated With the Proposed Functional-Test-Based Exchange
Definition
    The proposed functional-test-based exchange definition could result
in increased legal costs for market participants. Specifically, the
Proposed Rules could cause market participants to engage in a more
thorough and expansive compliance review of any changes in operations
out of concern that a large range of activities might meet the proposed
definition of exchange. This approach could also increase uncertainty
about the application of the Proposed Rules, which in turn may further
increase legal costs.
    In addition, market participants would decrease and slow down the
development of new products and technologies. Such development may
depend on the ability to rapidly develop and deploy new systems. The
need for more extensive compliance review, uncertainty about the
application of the Proposed Rules,\347\ and concerns that new systems
may inadvertently meet the definition of exchange \348\ could make such
a process more difficult. Market participants may come to regard some
areas of new product development as inherently risky, because of the
potential for regulatory costs, and decide to stop engaging in them.
---------------------------------------------------------------------------

    \347\ One commenter agrees with assessment. See DARLA, GBC, and
Global DCA Letter at 6 (stating that the broad language in the
Proposed Rules ``. . . would likely cause chilling effects and deter
further innovation and activity among early-stage technology
companies due to uncertainty over which technology services would
satisfy the new and expanded definition of exchange.'')
    \348\ One commenter expresses such concerns, stating ``[w]e have
significant concern that a lack of a specific definition for such a
broadly explained term will cause ongoing confusion and, as a
result, increase the potential for a market participant to
inadvertently run afoul of the obligations set forth in the
Proposals.'' See Chamber Letter at 4.
---------------------------------------------------------------------------

    One commenter states that the uncertainty caused by the expanded
definition of exchange in the Proposed Rules ``. . . is concerning and
likely to stifle innovation.'' \349\ Another commenter states that the
uncertainty of exposure to enforcement actions might stifle
innovation.\350\ While the Commission does not believe that innovation
will be impossible under the Proposed Rules, we acknowledge that there
could be less innovation as a result of the uncertainty and compliance
costs associated with the broad formulation of the Proposed Rules.
---------------------------------------------------------------------------

    \349\ See McHenry/Huizenga Letter at 2.
    \350\ See LexPunK Letter at 2.
---------------------------------------------------------------------------

iii. Costs Associated With Discontinuation of Non-Security-for-Security
Pairs Trading
    Many crypto asset securities are not traded in exchange for fiat
currencies but are instead traded for other crypto assets. To the
extent that a New Rule 3b-16(a) System enables the trading of crypto
asset securities for crypto assets that are not securities, that entity
may also incur the cost of having to stop enabling such trades, and the
resulting loss of revenue. Because pairs trading is common in crypto
asset markets, this cost may be significant for some New Rule 3b-16(a)
Systems. These costs may be mitigated if affected New Rule 3b-16(a)
Systems are able to arrange for a fiat currency market for the relevant
crypto asset security, and a separate fiat currency market in a
separate entity for the non-security crypto asset, so that it can
arrange for a pair of trades to take place that closely replicates the
desired trade. For systems that wish to complete the transaction
entirely on-chain, such arrangements are likely to be impossible, and
this mitigation would therefore not apply to them.
    Furthermore, because existing national securities exchanges and
ATSs currently do not facilitate trading between crypto asset
securities and non-security crypto assets, the loss of New Rule 3b-
16(a) Systems as platforms for engaging in such trades may be a
significant cost for market participants in crypto asset markets. The
inability to complete such trades using New Rule 3b-16(a) Systems could
require market participants to switch to other means of trading, such
as bilateral voice trading. To the extent such trading methods are not
the market participant's preferred method, this would increase trading
costs. Market participants may be able to mitigate these costs if New
Rule 3b-16(a) Systems are able to provide cash markets for the relevant
crypto assets, and arrange for a pair of trades that would closely
replicate the desired exchange.
c. Costs for Platforms Using Certain Technologies
    The Commission preliminarily believes that there may be costs
associated with complying with the Proposed Rules for New Rule 3b-16(a)
Systems that would perform exchange activities using certain
technologies that are used in the market for crypto asset trading
services.\351\ The Commission is unable to provide an exact estimate or
quantitative range for these compliance costs, because the Commission
lacks sufficient detail about the variety of platforms whose systems
use these technologies, or their options to comply. In the following
subsections the Commission provides a range of compliance costs related
to responsibilities for compliance, as well as a discussion of the
factors associated with certain technologies that might increase the
compliance costs of certain specific requirements. It is possible that
operating a system that uses these technologies to perform exchange
activities under the Proposed Rules in a manner that complies with
applicable regulations could significantly reduce the extent to which
the system is ``decentralized'' or otherwise operates in a manner
consistent with the principles that the crypto asset industry commonly
refer to as ``DeFi.''
---------------------------------------------------------------------------

    \351\ One commenter on the Proposing Release states that due to
the ``decentralized and autonomous nature of Decentralized
Protocols, and the lack of an intermediary who could serve as a
broker-dealer affiliate,'' the Proposed Rules would impose
significant burdens that had not been considered. See Blockchain
Association Letter II at 8. The Commission believes that the general
costs described throughout section V.C.2 as applicable, and the
specific costs discussed in this subsection, provide the necessary
consideration of such burdens.
---------------------------------------------------------------------------

i. Initial Costs of Compliance
    The Commission preliminarily believes that some New Rule 3b-16(a)
Systems that trade crypto asset securities may incur greater initial
costs to come into compliance, due to these systems' use of certain
technologies that, for example, allow them to automate portions of
their operations using smart contracts deployed on an underlying
blockchain.\352\ The Commission believes that there are a range of such
technologies, or a range of systems' use of such technologies, that
would entail differing initial costs, and has prepared a description of
two scenarios that we preliminarily believe covers the range of costs
likely to occur.\353\ These scenarios consist of an example of a system
that would likely have the lowest possible costs of compliance for a
system using such technologies, and an example of a hypothetical system
in which the cost of compliance is likely to be the highest possible.
The Commission preliminarily believes that the initial compliance costs
of the typical New Rule 3b-16(a) System that performs exchange

activities using such technologies would fall in between the costs
associated with these two examples. The Commission requests comment on
the issue of compliance costs of New Rule 3b-16(a) Systems that operate
in this manner.
---------------------------------------------------------------------------

    \352\ These technologies include, but are not limited to, system
architectures that permit RFQ systems to be run partly or wholly on-
chain using smart contracts.
    \353\ Providing an estimate corresponding to every
hypothetically possible design of systems using such technologies
would be impractical.
---------------------------------------------------------------------------

    At the low end of the range, the Commission preliminarily believes
a New Rule 3b-16(a) System that performs exchange activities using
these technologies may incur similar costs to those of a New Rule 3b-
16(a) System that does not use such technologies.\354\ This lower bound
is based on consideration of a hypothetical system using such
technologies in a way that the Commission believes would tend to
present the least difficulty in complying with the Proposed Rules. This
low-cost hypothetical case consists of a New Rule 3b-16(a) System that
would automate a portion of its operations using a set of smart
contracts \355\ that it developed and deployed itself; would have the
sole right and means \356\ to make alterations to the deployed smart
contracts; would receive any fees charged by the smart contracts, as
well as any fees collected in connection to the service through other
means; and would maintain all off-chain operations that might be
necessary to run the service.
---------------------------------------------------------------------------

    \354\ See supra section V.C.2.a and V.C.2.b covering these
costs.
    \355\ See supra section V.B.1.a discussing smart contracts for
DeFi platforms and their management.
    \356\ Possession of the sole means to make alterations to a
smart contract could consist of a design in which changes may be
made to the smart contract's code by using a unique private key, and
where that key is in the sole possession of the firm.
---------------------------------------------------------------------------

    In this case, the Commission believes the responsibility to bring
such a New Rule 3b-16(a) System into compliance may fall to this firm
and that under such circumstances, the cost of compliance would be
similar to that of a New Rule 3b-16(a) System that does not automate
any portion of its operations using a smart contract, as detailed in
sections V.C.2.a and V.C.2.b above. In particular, any alterations that
may need to be made to the smart contracts connected with the system in
order to bring it into compliance with the relevant regulations could
be implemented in a manner similar to alterations made to software
generally, due to the firm's control over those smart contracts.
    The Commission preliminarily believes that a New Rule 3b-16(a)
System that performs its exchange activities in part using smart
contracts, but that is not set up in the manner described above, may
have significantly higher costs of compliance than the lower bound. The
Commission is unable to provide a quantitative estimate of an upper
bound because the Commission lacks information on the costs of the
activities which may be necessary for more complex systems using such
technology to come into compliance.\357\ The Commission preliminarily
believes that a reasonable case, in which the highest possible
compliance costs would result, would be a New Rule 3b-16(a) System that
performs exchange activities in part using smart contracts, but in
which control over changes to the smart contracts is given to a token-
based voting mechanism, which may use governance tokens as discussed
above,\358\ and where the tokens are dispersed among a large number
\359\ of investors.
---------------------------------------------------------------------------

    \357\ In particular, the Commission does not have examples of
systems using such technology that are registered with the
Commission as an exchange or as an ATS. See supra section V.B.2.
    \358\ See supra note 15.
    \359\ ``Large'' could mean millions of retail investors, each
with some share in the vote determined by the number of tokens they
hold. One prominent DeFi platform has approximately 755 million
outstanding tokens, each with a share in governance votes. See Curve
DAO, CoinGecko, available at https://www.coingecko.com/en/coins/curve-dao-token. The Commission understands that, while protocols
may have a large number of outstanding governance tokens, control of
those tokens (or their voting rights) may be held by a limited
number of entities.
---------------------------------------------------------------------------

    In this scenario, the Commission believes that the holders of the
governance tokens, or other tokens that carry voting rights, may bear
the responsibility of ensuring the compliance of the system. In such a
scenario, the Commission believes that the holders of the relevant
tokens could choose to form an organization or association, or to
designate a member of a group of persons, which would be responsible
for undertaking the activities necessary to bring the New Rule 3b-16(a)
System into compliance with Regulation ATS.
    The costs to produce such an organization or association, or to
designate a member of a group of persons may involve the effort
required on the part of the relevant token holders to coordinate and
reach agreement on the design of such an organization,\360\ legal
expenses associated with the design and legal registration of the
entity, or costs involved with designating a member of the group of
persons responsible for ensuring compliance. If the relevant tokens of
a smart contract entitle their holders to a share of transaction fees
paid to the smart contract, or some other form of return, these
expenses could be paid using such returns; otherwise, the holders of
the tokens themselves may have to supply the necessary funds.
---------------------------------------------------------------------------

    \360\ The Commission believes that this may be a difficult
undertaking, given the potentially large number of individuals and
entities that would have to reach agreement. Such entities may also
lack the sophistication or resources required to easily navigate the
process of forming such an organization or association and coming
into compliance.
---------------------------------------------------------------------------

    Also, because changes to the smart contracts would require a vote,
the Commission preliminarily believes that the process of implementing
any changes to the smart contracts that are required for compliance may
be more costly than in the case where a single firm holds all control.
    It is possible that, when it becomes necessary for the holders of
relevant tokens to form an organization or association, or to designate
a member of a group of persons, some of those holders might choose to
sell their tokens to avoid taking on regulatory burdens, which the
Commission expects would ultimately result in there being fewer holders
of the governance tokens. The Commission does not have the data it
would need to estimate the extent to which this would happen, but to
the extent that this process significantly reduces the number of
holders of a smart contract's governance tokens, the Commission expects
that the costs of compliance for such a smart contract would fall
between the two extremes already discussed.
    The Commission believes that there is a third configuration of
smart contract management which may have costs either inside the range
described above or outside this range. This is the configuration
entailed by a New Rule 3b-16(a) System that would automate all of its
operations via smart contracts that are immutable. This immutability
makes it impossible to alter the code of a smart contract using the
typical processes of a public blockchain once it has been deployed,
even by the entity responsible for its deployment and responsible for
bringing such a system into compliance. However, the Commission
understands that it is possible for the miners or validators of a smart
contract's underlying blockchain to effect a change to a blockchain
through, for example, a fork that would impact interactions with the
immutable smart contract, and that this capacity has already been used
on rare occasions.\361\
---------------------------------------------------------------------------

    \361\ See, e.g., https://spectrum.ieee.org/ethereum-blockchain-forks-to-return-stolen-funds, discussing how miners of a major
public blockchain ``forked'' the chain to change an undesired
result.
---------------------------------------------------------------------------

    In this case, the costs would depend on the specific factual
circumstances, including, among other considerations, the activities
performed by persons that, for example, could fund or code changes to
the blockchain, or validate or mine

the transactions, or some combination thereof.\362\ It is possible that
in this case costs may exceed the upper bound described above.\363\ The
Commission is uncertain as to the exact size of the costs that may be
involved and requests comment on the issue.
---------------------------------------------------------------------------

    \362\ See supra notes 75-80 and accompanying text.
    \363\ The Commission preliminarily believes that costs may be
higher for reasons that might include technical difficulties that
would not be encountered when bringing a Rule 3b-16(a) System based
on a mutable smart contract into compliance.
---------------------------------------------------------------------------

    In addition, the Commission preliminarily believes that in a
circumstance in which only validators or miners are able to stop
effectuating transactions that trigger the automated operations of a
smart contract, the validators or miners may discontinue processing
transactions resulting from trading interest matched by the New Rule
3b-16(a) System. In the event that validators or miners choose to
discontinue processing such transactions, there may be costs to market
participants associated with arranging to direct their trading interest
to other venues. If instead miners or validators incur costs by
choosing to continue processing transactions of such a system, the
Commission preliminarily believes that they may pass on some of these
costs to users, as described above.\364\ It may also be the case that
even if the miners or validators as a whole opt to effect a change to a
blockchain or smart contracts, some miners or validators could choose
to cease processing transactions of a blockchain.
---------------------------------------------------------------------------

    \364\ See supra section V.C.2.a.
---------------------------------------------------------------------------

    The Commission is not aware of a specific example of a New Rule 3b-
16(a) System which automates all of its operations by means of
immutable smart contracts. However, the Commission has limited
information on such systems and requests comment on this issue.
    One commenter describes ``practical considerations'' that it
believes might mean that it was ``not possible'' for certain systems,
which they term ``Decentralized Exchanges'' or ``DEXes,'' to comply
with the Proposed Rules.\365\ These considerations include the fact
that, once launched, smart contracts ``are not controlled or
intermediated by any person or group of persons,'' \366\ and in
particular, that responsibility for the system could not be attributed
to the persons who created or deployed the smart contract because
``once deployed, the DEX typically cannot be significantly altered or
controlled by any such persons.'' \367\
---------------------------------------------------------------------------

    \365\ See Coinbase Letter at 7.
    \366\ See id. at 6.
    \367\ Id.
---------------------------------------------------------------------------

    The Commission preliminarily believes that our analysis adequately
addresses these concerns. Specifically, smart contracts can be
controlled after deployment, however, in some instances, the functions
of miners or validators may be needed to exert such control. The
discussion above provides a range of possible scenarios that have
different possible costs and may result in different entities being
affected, but the Commission believes that these costs are not
impossible to pay.\368\
---------------------------------------------------------------------------

    \368\ As discussed above, these costs may be high enough that
the group of persons responsible for the exchange choose to exit the
market for crypto asset security trading services rather than
continue operations. See infra section V.C.3.a (discussing entry and
exit as result of compliance costs).
---------------------------------------------------------------------------

    Another commenter states that the compliance burdens imposed by the
Proposed Rules ``may simply be insurmountable due to the
incompatibility of the decentralized nature of Decentralized Protocols
with the requirement for a centralized, regulated intermediary imposed
by the `exchange' definition.'' \369\ This commenter also states that
``it is unclear how [persons related to Decentralized Protocols] could
achieve compliance with the relevant regulations.''
---------------------------------------------------------------------------

    \369\ See Blockchain Association Letter II at 8.
---------------------------------------------------------------------------

    The Commission acknowledges that, in the case of New Rule 3b-16(a)
Systems that use the technologies discussed above to automate portions
of their operations using smart contracts, validators and miners may
choose to take actions to form a single entity, like an organization,
and register with the Commission. The Commission preliminarily believes
that our analysis, given above, adequately addresses these concerns of
control over the smart contract, which entities may incur the costs of
compliance, and how large those costs may be. However, the Commission
acknowledges that these costs may cause some or all of the entities
that make available such a system to cease the activities that make
them responsible for the system's compliance, potentially resulting in
the system's exit from the market.
    Another commenter raises concerns about potential impossibility of
limiting certain systems' activity to non-securities trading in the
event that the creators of the system wish to avoid having to comply
with federal securities laws, stating that it would be impossible for
any ``organization, group or association'' to ensure no securities are
made available for trading on such a system.\370\
---------------------------------------------------------------------------

    \370\ See Delphi Digital Letter at 7.
---------------------------------------------------------------------------

    The Commission acknowledges that there may be existing New Rule 3b-
16(a) Systems, with smart contracts designed to permit anyone with
access to the blockchain to begin trading in any crypto asset supported
by the blockchain, including those that are securities. In such
circumstances, the smart contract(s) may have to be altered in order to
ensure that the system does not trade securities. As discussed above,
this could be achieved either by any organization, association, or
group of persons that can make changes to the smart contract, or by the
miners or validators of the relevant blockchain in the event that the
smart contracts are immutable.
    Because of the easily accessible nature of many public blockchains,
the Commission preliminarily believes that construction, deployment,
and maintenance of a New Rule 3b-16(a) System that uses the
technologies described above could be achieved by groups of persons who
are unsophisticated participants in financial markets and may not
appreciate the significance of maintaining a system that meets the
definition of exchange as proposed to be amended and therefore of
having obligations to comply with the relevant securities laws. The
Commission believes that the costs of compliance for such persons would
be higher because of their lack of experience with federal securities
laws. Some such persons may choose to discontinue their systems rather
than bear the costs of compliance.
ii. Unique Costs for Systems Using Certain Technologies
    The Commission preliminarily believes that certain New Rule 3b-
16(a) Systems may have difficulties in complying with some rules. The
New Rule 3b-16(a) Systems which may have such difficulties are systems
which use technologies that, for example, allow them to automate
portions of their operations using smart contracts deployed on an
underlying blockchain. The rules for which there may be such
difficulties include Regulation SCI, as well as the Fair Access Rule of
Regulation ATS. Systems that use these technologies may have
difficulties in complying with these rules when compared with platforms
that do not use such technologies. For example, there may be
difficulties in ensuring the compliance of SCI systems that run using
DLT, such as smart contracts.
    One commenter states that the realities of decentralization make
compliance ``impracticable'' for certain systems, which the commenter
terms ``DeFi.'' \371\ This commenter questioned

what entity or group of entities involved in the operation of such a
system would be responsible for complying with Regulation ATS,\372\ and
additionally stated that even if this were clear, it was not obvious
that this party would have the necessary information to fulfill that
responsibility.
---------------------------------------------------------------------------

    \371\ See a16z Letter at 14.
    \372\ See id. at 3, 14.
---------------------------------------------------------------------------

    The Commission discusses above that a DLT-based market place or
facilities for bringing together buyers and sellers of securities is
typically maintained or provided by a single organization but a
combination of the actors can constitute, maintain, or provide,
together, a market place for securities as a group of persons, which
would be considered an exchange under section 3(a)(1) of the Exchange
Act and Rule 3b-16 thereunder.\373\ The Commission acknowledges that
there may be some existing systems of this type designed in such a way
that the information necessary to comply with the disclosure
requirements of Regulation ATS is not possessed by any singular entity.
In such a case, the Commission believes that the entities responsible
for compliance may find it necessary to form an organization or
designate a member of the group of persons to be responsible for
compliance, as discussed above,\374\ and that such an organization or
member of the group of persons would be capable of collecting the
information necessary to comply. In cases of a system using DLT, where
some or all of this information is not already possessed by entities
responsible for compliance, the manner in which the system functions
may have to be altered to make compliance with registration
requirements possible. As discussed above,\375\ this could be achieved
by the organization or group of persons responsible.
---------------------------------------------------------------------------

    \373\ See supra section II.B.
    \374\ See supra section V.C.2.c.i.
    \375\ See supra section V.C.2.c.i.
---------------------------------------------------------------------------

    The Commission believes that access to New Rule 3b-16(a) Systems
that make extensive use of DLT in their operations may happen through
processes not common to systems that do not make extensive use of such
technology. In this case, such a New Rule 3b-16(a) System may have
significant challenges in ensuring compliance with the Fair Access Rule
of Regulation ATS.
    The challenges that may be faced by New Rule 3b-16(a) Systems that
make extensive use of DLT in complying with Regulation ATS and
Regulation SCI may impose significant costs. It is possible that these
costs may cause some such systems to exit the market, or to restructure
their technology to facilitate a lower compliance cost. In addition,
compliance with the applicable regulations may result in significant
alteration to the manner in which such systems operate.
3. Efficiency, Competition, and Capital Formation
a. Competition
    The Commission believes that the Proposed Rules could affect
competition. The Proposed Rules could promote competition by requiring
ATSs and New Rule 3b-16(a) Systems to operate on a more equal basis in
the market for crypto asset securities trading services. The Fair
Access Rule of Regulation ATS could promote competition in the market
for trading services in the applicable securities markets.\376\
Furthermore, the public disclosure of Form ATS-N could promote
competition and incentivize innovation in the market for trading
services in the applicable securities markets.\377\
---------------------------------------------------------------------------

    \376\ See infra section V.C.3.a.i.e. for discussion about the
impact of the Fair Access Rules on competition.
    \377\ See infra section V.C.3.a.i.f for discussion about the
impact of public disclosure via Form ATS-N under Rule 304 of
Regulation ATS on competition.
---------------------------------------------------------------------------

    Also, the costs of the Proposed Rules associated with, among other
things, altering business practices to come into compliance, becoming a
broker-dealer, filing Form ATS or Form ATS-N as applicable, and
complying with the Fair Access Rule of Regulation ATS and Regulation
SCI as applicable could result in higher barriers to entry and
reduction in the rate of adoption of new technologies in the market for
crypto asset securities trading services. Furthermore, the requirements
of broker-dealer registration, Form ATS, and Form ATS-N could reduce
operational flexibility. The Commission acknowledges that this
reduction in operational flexibility could, under certain
circumstances, make it more difficult to innovate. That said, in
addition to the other benefits discussed above,\378\ the Commission
believes that the proposed amendments would foster competition by
requiring current ATSs and New Rule 3b-16(a) Systems to operate on a
more equal basis in the market for trading services. This, in turn,
would help promote innovation. To the extent that the Proposed Rules
result in significant costs for New Rule 3b-16(a) Systems, these
systems could exit the market for crypto asset securities trading
services. In particular, to the extent that New Rule 3b-16(a) Systems
using certain technologies incur higher costs,\379\ there may be a
higher chance of these New Rule 3b-16(a) Systems exiting the market. As
in the Proposing Release, the Commission lacks certain information
necessary to quantify the extent to which entities that otherwise would
seek to operate as a trading venue in the market for crypto asset
securities would be dissuaded from doing so.
---------------------------------------------------------------------------

    \378\ See supra section V.C.1
    \379\ See supra section V.C.2.c.
---------------------------------------------------------------------------

    However, the Commission believes that these adverse effects on
competition could be mitigated to some extent. To the extent that the
market for crypto asset securities trading services is competitive and
that a limited number of New Rule 3b-16(a) Systems exit the market, the
adverse effect on overall competition among trading platforms would be
mitigated to some extent because the order flow that was being sent to
exiting New Rule 3b-16(a) Systems would likely be absorbed and
redistributed amongst other New Rule 3b-16(a) Systems or systems that
meet the existing criteria of Rule 3b-16(a).\380\
---------------------------------------------------------------------------

    \380\ To the extent that the market for trading services is
competitive, the adverse effect on competition may not result in a
significant increase in trading costs for market participants
because the order flow that was being sent to those exiting New Rule
3b-16(a) Systems would likely be absorbed and redistributed amongst
other New Rule 3b-16(a) Systems or systems that meet the existing
criteria of Rule 3b-16(a).
---------------------------------------------------------------------------

    One commenter states that regulating ``DeFi protocols or CPSs (or
related parties)'' as exchanges might ``operate as a ban'' due to the
inability of those entities to comply with registration
requirements.\381\ Another commenter also states that the proposed
amendments might amount to a ``back-door prohibition of a vast swathe
of actual and potential peer-to-peer finance protocols'' due to the
inability for some entities to feasibly comply.\382\ Another commenter
states that ``subjecting DeFi systems to a regulatory regime that they
cannot comply with'' could force them into extinction.\383\
---------------------------------------------------------------------------

    \381\ See DeFi Education Fund Letter at 8.
    \382\ See Wells Letter at 1.
    \383\ See a16z Letter at 11.
---------------------------------------------------------------------------

    The Commission acknowledges that the costs of compliance may be
greater for market participants that trade crypto asset securities than
for those that trade non-crypto asset securities. However, the
Commission believes that the additional costs of compliance experienced
by market participants that trade crypto asset securities will vary
depending on the technologies these participants use to perform
exchange activity. The Commission lacks some information necessary to
precisely estimate the degree to which these

market participants may experience greater costs of compliance, but
expects that such costs would fall within a range. At the lower end of
the range, the Commission believes that market participants that use
technologies similar to those commonly used in the market for
traditional securities, such as off-chain RFQ systems, will also incur
similar costs of compliance. At the other end of the scale, the
Commission expects that costs of compliance may be significantly higher
for market participants that extensively or exclusively use DLT, such
as smart contracts, to perform exchange activities. Accordingly, while
the Commission acknowledges that the Proposed Rules could raise
barriers to entry into the market for crypto asset security trading
services, the Commission believes that these barriers would be most
significant for market participants that perform exchange activity in a
way that extensively or exclusively uses DLT. The Commission
additionally believes that for market participants that perform
exchange activity using non-DLT methods, these barriers would likely be
comparable to those experienced by participants in the market for
traditional securities trading services.
    One commenter states that the cost of compliance and consequences
of non-compliance would have the effect of ``chilling, restricting or
prohibiting outright the creation of code for peer-to-peer digital
asset trading or websites that provide access to information about
those protocols.'' \384\ Another commenter states that, to the extent
that ``adoption of the Proposal will cause the developers of code and
smart contracts related to a Decentralized Protocol, or the maintainers
of online websites that merely enable access to a Decentralized
Protocol, to be captured under the `exchange' definition,'' the
proposal might cause such persons to cease their activities, ``dealing
a death blow to new activity in this sector.'' \385\
---------------------------------------------------------------------------

    \384\ See Delphi Digital Letter at 11.
    \385\ See Blockchain Association Letter II at 6.
---------------------------------------------------------------------------

    The Commission does not believe that the amended definition of
exchange would include the entities responsible for these
``Decentralized Protocols'', except to the extent that they also engage
in activity that meets the definition of exchange as proposed to be
amended in the Proposed Rules.\386\ While the Commission acknowledges
that the Proposed Rules may impose compliance costs, the Commission
does not believe that the circumstances in which such entities would
incur compliance costs would differ from the circumstances in which
entities in non-crypto asset securities would incur compliance costs,
namely, at the point at which such an entity engages in activity that
meets the definition of exchange as proposed to be amended. However,
the Commission acknowledges that because the compliance costs for
entities that trade crypto asset securities may be higher than for
those that trade non-crypto asset securities,\387\ the impact of those
costs on innovation in crypto asset securities may be greater.
---------------------------------------------------------------------------

    \386\ See supra section V.C.2.a.
    \387\ See supra sections V.C.2.a and V.C.2.c.ii.
---------------------------------------------------------------------------

    One commenter stated that the Proposed Rules might ``drive
financial innovation offshore.'' \388\ This commenter also added that
the Proposed Rules ``would preclude the development in the U.S. of many
software tools and applications, including, but not limited to, DeFi
protocols.'' \389\
---------------------------------------------------------------------------

    \388\ See DeFi Education Fund Letter at 12.
    \389\ See id. at 17.
---------------------------------------------------------------------------

    The Commission acknowledges that, to the extent that the Proposed
Rules impose compliance costs on entities responsible for innovation,
such costs may affect their decision on which jurisdiction they choose
to operate their business in. However, the Commission believes that
these costs may be mitigated. The Commission believes that, at the
lower end of this range, an entity that engages in the development of
new technologies in the market for crypto asset trading services would
incur compliance costs only once its innovative technology allows
investors to trade securities. If such an entity develops its
technology in an environment that does not enable investors to trade
securities, such as a testnet,\390\ the Commission does not believe it
would incur compliance costs in connection with these activities.
Additionally, while the Commission lacks certain data that would enable
the Commission to precisely estimate the compliance costs that an
innovative entity would face once its innovative technology enables
investors to trade crypto asset securities, it believes that these
costs would lie within a range. At the lower end of this range, the
Commission believes that a market participant that uses innovative
technology similar to technology that is used in traditional financial
markets would also incur similar compliance costs. At the other end of
the scale, the Commission expects that compliance costs would be
largest for entities developing technologies that rely heavily on DLT,
such as smart contracts, to perform exchange activity, and have minimal
or no off-chain components. The Commission additionally believes that
many systems that would experience these higher costs could be
restructured to make less extensive use of these novel technologies,
although this could significantly reduce the extent to which these
systems operate in accordance with ``DeFi'' principles.
---------------------------------------------------------------------------

    \390\ This term refers to a blockchain designed to test
technologies, such as smart contracts, in a manner that involves no
risk of monetary loss. Testnets support a set of tokens that are
distinct from ``mainnet'' tokens, and which are freely available
from ``faucets'' that add them to wallets on request. As such,
testnet tokens have no monetary value and are not securities. See
https://coinmarketcap.com/alexandria/glossary/testnet.
---------------------------------------------------------------------------

    One commenter states their belief that the Proposed Rules would
cause platforms to either ``operate exclusively outside the United
States or exit the business,'' due to lack of a ``realistic prospect of
obtaining SEC authority to operate as an exchange or SEC and FINRA
authority to operate as an ATS.'' \391\ This commenter notes that the
Commission had not, at the time of writing, ``registered any digital
asset platform as an exchange.'' \392\
---------------------------------------------------------------------------

    \391\ See GDCA Letter II at 7.
    \392\ See id. at 13.
---------------------------------------------------------------------------

    While the Commission acknowledges that the Proposed Rules would
impose costs on New Rule 3b-16(a) Systems that trade crypto asset
securities, which may in turn raise barriers to entry as discussed
above or create incentives to exit the market, the Commission disagrees
that compliance would be ``infeasible.'' The Commission has discussed,
above, the manner and extent to which it believes that compliance costs
may create barriers to entry for market participants that seek to trade
crypto asset securities. To the extent that market participants that
trade crypto asset securities face barriers to entry or incentives to
exit due to higher compliance costs, or perceive this to be the case,
the Commission acknowledges that such entities may instead choose to
operate outside the U.S. or exit the market.
i. Regulation ATS
(a) Regulatory Framework
    Market participants may consider registered exchanges, ATSs, and
broker-dealers (e.g., single dealer platforms) to send their order flow
in crypto asset securities. As discussed in the Proposing Release,\393\
to the extent that current ATSs and New Rule 3b-16(a) Systems compete,
the proposed changes to Exchange Act Rule 3b-16, which would subject
New Rule 3b-16(a) Systems to the exchange regulatory

framework, which includes the option to comply with Regulation ATS,
would promote competition by requiring current ATSs and New Rule 3b-
16(a) Systems to operate on a more equal basis in securities markets.
The Commission believes this to be the case in the market for crypto
asset securities as it is in the market for the securities discussed in
the Proposing Release. To the extent that registered exchanges, ATSs,
broker-dealers compete for order flows in the crypto asset securities
market, the differential compliance costs for exchange, ATS, and
broker-dealer would affect competition across these different types of
trading platforms. The Commission acknowledges that national securities
exchanges would incur significantly higher compliance costs than ATSs
and broker-dealers, and ATSs would incur higher compliance costs than
broker-dealers. Higher compliance costs could put registered exchanges
at a disadvantage in competing against ATSs and broker-dealers that
trade the same types of securities, and similarly put ATSs at a
disadvantage in competing against broker-dealers. Although registered
exchanges, ATSs, and broker-dealers may compete for order flows, they
provide different services and are subject to different regulatory
obligations. Furthermore, to the extent that New Rule 3b-16(a) Systems
that use certain technologies to compete with other New Rule 3b-16(a)
Systems for order flows, higher costs for New 3b-16(a) Systems that use
certain technologies would put such systems at a competitive
disadvantage against other New Rule 3b-16(a) Systems.\394\
---------------------------------------------------------------------------

    \393\ See Proposing Release at 15634.
    \394\ See supra section V.C.2.c for discussion about the
additional costs for New 3b-16(a) Systems that use certain
technologies.
---------------------------------------------------------------------------

    One commenter states that the Proposed Rules would advantage
``traditional financial services companies,'' due to ``fundamentally
dissimilar technologies.'' \395\ This commenter adds that the Proposed
Rules would ``limit competition and transparency by entrenching
existing market players'' to the detriment of investors and the public,
but does not specify who these existing market players might be.\396\
The commenter additionally states their concern that the Proposed Rules
might include in the revised definition of exchange certain entities
that contribute code ``to an open-source project that subsequently
allows third parties to engage in trading activity'' but have no
ability ``to supervise that activity or impose limitations on the types
of orders that are entered.'' The commenter states that under the
Proposed Rules, a developer that cannot comply with registration
requirements might leave the market or provide services to a
traditional trading platform, ``further entrenching the traditional
systems.''
---------------------------------------------------------------------------

    \395\ See DeFi Education Fund Letter at 2.
    \396\ See DeFi Education Fund Letter at 10.
---------------------------------------------------------------------------

    The Commission does not believe that the amended definition of
exchange would include the entities responsible for innovation in the
markets for crypto assets or crypto asset trading services, except to
the extent that they also engage in activity that meets the definition
of exchange as amended in the Proposed Rules.\397\ The Commission
acknowledges that, to the extent that market participants who trade
crypto asset securities compete with traditional financial services
firms and that such market participants incur greater costs of
compliance,\398\ the Proposed Rules could give traditional financial
services firms a competitive advantage. Because the Commission lacks
information on the degree to which such market participants would incur
greater costs of compliance, the Commission cannot estimate the extent
of this advantage. Additionally, the Commission believes that the
Proposed Rules would cause New Rule 3b-16(a) Systems to compete on a
more equal basis with their main competitors in the market for crypto
asset securities, which the Commission believes may already be subject
to federal securities regulations.\399\
---------------------------------------------------------------------------

    \397\ See supra section V.C.2.a.
    \398\ See supra sections V.C.2.a and V.C.2.c.
    \399\ See supra section II.B.
---------------------------------------------------------------------------

    As discussed in the Proposing Release,\400\ the Commission
acknowledges that some New Rule 3b-16(a) Systems could restructure
their operations to not meet the Rule 3b-16 criteria as proposed to be
amended to avoid being subject to Regulation ATS and Regulation SCI if
the requirements are too burdensome or impair the ability of the
trading venue to compete. As in the Proposing Release, the Commission
believes that the risk of this occurring may be mitigated because the
proposed amendments to Rule 3b-16 may make it difficult for New Rule
3b-16(a) Systems to restructure their operations to not meet the Rule
3b-16 criteria as proposed to be amended. To the extent this does
occur, the benefits and enhancements to competition discussed above
would be reduced. The Commission believes that these effects would
apply to New Rule 3b-16(a) Systems that trade in crypto asset
securities as they would to New Rule 3b-16(a) Systems that trade the
securities discussed in the Proposing Release.
---------------------------------------------------------------------------

    \400\ See Proposing Release at 15634.
---------------------------------------------------------------------------

    As discussed in the Proposing Release,\401\ the Commission
acknowledges that subjecting New Rule 3b-16(a) Systems to the
requirements of Regulation ATS could reduce operational flexibility.
For example, it would be more costly for New Rule 3b-16(a) Systems to
implement significant changes to operational facets that would be
required to be reported on Form ATS or Form ATS-N. This reduction in
operational flexibility could, under certain circumstances, make it
more difficult to innovate. The Commission believes this effect would
apply to New Rule 3b-16(a) Systems that trade crypto asset securities
in the same manner that it would to New Rule 3b-16(a) Systems that
trade non-crypto asset securities discussed in the Proposing Release.
However, as in the Proposing Release, in addition to the other benefits
discussed above, the Commission believes that the Proposed Rules could
foster competition by requiring current ATSs and New Rule 3b-16(a)
Systems to operate on a more equal basis in the market for crypto asset
security trading services. This, in turn, could help promote
innovation.
---------------------------------------------------------------------------

    \401\ See id.
---------------------------------------------------------------------------

(b) Compliance Costs of Regulation ATS
    To the extent that the costs \402\ associated with altering
business practices for New Rule 3b-16(a) Systems to come into
compliance with Regulation ATS are significant enough to make these
systems unprofitable, these systems could exit the market for crypto
asset securities trading services, adversely affecting
competition.\403\ To the extent that New Rule 3b-16(a) Systems using
certain technologies incur additional costs to come into compliance
with Regulation ATS, these systems could have a higher chance of
exiting the market for crypto asset securities trading services.\404\
Furthermore, to the extent the Proposed Rules result in a New Rule 3b-
16(a) System that trades less liquid securities exiting the market for
trading services, it could increase the trading costs of its

subscribers if they need to find a new trading venue or are forced to
go through multiple intermediaries (i.e., broker-dealers) to find
counterparties. However, to the extent that the market for crypto asset
securities trading services is competitive and that a limited number of
New Rule 3b-16(a) Systems exit the market, the adverse effect on
overall competition among trading platforms would be mitigated to some
extent.
---------------------------------------------------------------------------

    \402\ See infra sections V.C.3.a.i.c) and V.C.3.a.i.d) for
discussions about the impact of costs associated with Rule 301(b)(1)
(broker-dealer registration requirements) and Rule 301(b)(5) (the
Fair Access Rule) of Regulation ATS on competition, respectively.
    \403\ See supra sections V.C.2.b and V.C.2.c for discussion
about the costs associated with changing business practices to come
into compliance with Regulation ATS.
    \404\ See supra section V.C.2.c for discussion about the
additional costs associated with changing business practices to come
into compliance with Regulation ATS for New Rule 3b-16(a) Systems
that use certain technologies.
---------------------------------------------------------------------------

    Furthermore, the Commission preliminarily believes that the
compliance costs associated with Regulation ATS would have different
effects on the competitive position of ATSs depending on their size. As
a result of the Proposed Rules, all New Rule 3b-16(a) Systems would be
subject to Rule 301(b)(2), Rule 301(b)(9) and Rule 301(b)(10), Rule
302, and Rule 303. As discussed above \405\ and in the Proposing
Release,\406\ most of the estimated compliance costs associated with
these rules would be fixed costs to those New Rule 3b-16(a) Systems
regardless of the amount of trading activity that takes place on them,
and thus, these compliance costs would represent a larger fraction of
revenue for a small (measured in trading volume) New Rule 3b-16(a)
System relative to that for a large New Rule 3b-16(a) System.
Furthermore, most of the estimated compliance costs associated with the
requirements of Form ATS-N under Rule 304, which all New Rule 3b-16(a)
Systems that trade NMS stocks or government securities would incur,
would be fixed costs.\407\ This could have an adverse impact on New
Rule 3b-16(a) Systems of small size in competing against larger ATSs,
which could act as a deterrent or a barrier to entry for potential New
Rule 3b-16(a) Systems or result in small New Rule 3b-16(a) Systems
exiting the market for trading services. However, if small New Rule 3b-
16(a) Systems engage in providing simpler services, these small New
Rule 3b-16(a) Systems are likely to incur lower compliance costs. The
Commission believes that these effects would apply to the market for
crypto asset securities in the same manner that they would to the
market for non-crypto asset securities.
---------------------------------------------------------------------------

    \405\ See supra section VIII.C.2.a.i.
    \406\ See Proposing Release at note 1165.
    \407\ See supra section VIII.C.2.a.i and Proposing Release,
section VIII.C.2.a.i.
---------------------------------------------------------------------------

    The Commission acknowledges the Proposed Rules could reduce
operational flexibility, which could, under certain circumstances, make
it more difficult to innovate or reduce the rate of the adoption of new
technologies. As in the Proposing Release, the Commission believes
that, to the extent the Proposed Rules force an entity that develops
new technologies to exit the market, it may be able to restructure
itself (rather than operate as an ATS) as a third-party vendor and
continue to provide certain innovative services, or otherwise sell its
technology to another ATS, which would mitigate to some extent any
adverse impact the Proposed Rules may have on the adoption of new
technologies in the market for crypto asset security trading services.
(c) Broker-Dealer Registration Requirements
    In addition to the compliance costs associated with the
requirements of Regulation ATS, non-broker-dealer-operated New Rule 3b-
16(a) Systems without a broker-dealer affiliate would incur additional
compliance costs related to registering with the Commission as broker-
dealers, becoming members of an SRO, such as FINRA, and maintaining
broker-dealer registration and SRO membership. Furthermore, these non-
broker-dealer operators could incur costs associated with altering
business practices to come into compliance with the Proposed
Rules.\408\ To the extent that the costs associated with changing
business practices to come into compliance with the Proposed Rules is
significant enough to render non-broker-dealer operators of New Rule
3b-16(a) Systems unprofitable to stay in the business, these operators
of New Rule 3b-16(a) Systems would exit adversely impacting competition
in the market for crypto asset securities trading services.\409\
However, to the extent that the market for crypto asset securities
trading services is competitive and that a limited number of New Rule
3b-16(a) Systems exit the market, the adverse effect on overall
competition would be mitigated.
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    \408\ See supra section V.C.2.a.ii for discussion about the
costs associated with changing business practices to come into
compliance with the Proposed Rules.
    \409\ The Commission believes that the costs associated with the
broker-dealer registration requirements could adversely affect the
rate of innovation. See supra sections V.C.3.a.i and V.C.3.a.i.c)
for discussion about the impact of the Proposed Rules on the rate of
innovation.
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(d) Ineffectiveness Declaration
    The proposed ability for the Commission to be able to declare a
Form ATS-N or Form ATS-N amendment ineffective could result in
compliance costs for New Rule 3b-16(a) Systems that trade NMS stocks
and may affect competition in the market for NMS stock trading
services. However, as discussed in the Proposing Release,\410\ based on
Commission staff's experience with NMS Stock ATSs that filed an initial
Form ATS-N, the Commission preliminarily believes this would be an
unlikely result. The Commission believes this unlikeliness would extend
to the market for crypto asset securities that are NMS stocks.
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    \410\ See Proposing Release at 15636 including notes 1180 and
1183.
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(e) Fair Access
    The Commission believes that applying the Fair Access Rule to New
Rule 3b-16(a) Systems could increase competition between market
participants in the markets for corporate debt securities, municipal
securities, NMS stocks, and equity securities that are not NMS stocks.
As discussed above, to the extent that there are market participants
currently excluded from trading on significant New Rule 3b-16(a)
Systems, applying the Fair Access Rule to New Rule 3b-16(a) Systems
could increase trading venue options available to these market
participants, which could lower their trading costs. This, in turn,
could increase competition among market participants trading on these
platforms, which could be significant sources of liquidity and
represent a significant portion of trading volume in their respective
markets. However, these competitive effects may be reduced to the
extent that some existing subscribers of trading venues that are
subject to the Fair Access Rule redirect their trading interest to
other trading venues not subject to the Fair Access Rule in order to
preserve some of the benefits they may receive from a trading venue
limiting access. If the Proposed Rules to apply certain aggregate
volume thresholds increase the number of smaller affiliate ATSs that
would be subject to the Fair Access Rule, it could also increase
competition among market participants, to the extent that certain
market participants are currently excluded from accessing these
platforms. The Commission believes that these effects on competition
would apply to New Rule 3b-16(a) Systems that trade crypto asset
securities in the same manner that they would to New Rule 3b-16(a)
Systems that trade non-crypto asset securities.
    Additionally, as discussed in the Proposing Release, the Proposed
Rules to apply certain aggregate volume thresholds to the Fair Access
Rule could also harm competition among trading venues in the markets
for corporate debt, municipal securities, NMS stock and equity
securities that are not NMS

stocks if they cause a broker-dealer or affiliated broker-dealers that
operate multiple ATSs to restrict trading in one or more securities, or
shut down one or more of their smaller ATSs, in order to avoid
triggering the Fair Access volume threshold. However, because the
trading volume on these smaller ATSs would likely be absorbed and
redistributed amongst other ATSs or non-ATS venues, the Commission
believes that the overall effects on competition among trading venues
may not be significant. To the extent that the markets for trading
services are competitive, the Commission believes that such competitive
effects would be applicable to New 3b-16(a) Systems that trade crypto
asset securities that are corporate debt securities, municipal
securities, NMS stock, and equity securities that are not NMS stocks.
(f) Public Disclosure
    As discussed in the Proposing Release,\411\ the public disclosure
of Form ATS-N would enhance the operational transparency of New 3b-
16(a) Systems that trade in NMS stocks, including crypto asset
securities that are NMS stocks. The enhancement in the operational
transparency of New Rule 3b-16(a) Systems would promote competition in
the markets for crypto asset securities trading services. The increase
in competition could result in lower venue fees, improve the efficiency
in customer trading interest or order handling procedures, and promote
innovation. To the extent that non-ATS venues compete with ATSs' order
flows, the increased operational transparency of ATSs could also
incentivize non-ATS trading venues to reduce their fees to compete with
ATSs. The Commission believes that these effects would apply to the
market for crypto asset securities trading services. However, because
New Rule 3b-16(a) Systems using smart contracts operate using code
which may be, at least in part, publicly viewable, it is possible that
the impacts of Form ATS-N disclosures on competition may be reduced,
for such systems. However, because this code is not disclosed in a form
that is standardized or readable to a layman, the Commission believes
that this reduction of impact may not be significant.
---------------------------------------------------------------------------

    \411\ See Proposing Release at 15637.
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    As discussed in the Proposing Release,\412\ because the public
disclosure of Form ATS-N would make it easier for market participants
to compare the quality of trading services, such as innovative trading
functionalities, order handling procedures, and execution statistics,
market participants would be more likely to send their trading
interests or orders to ATSs, including New 3b-16(a) Systems, that offer
better trading services. This would promote greater competition in the
market for trading services and incentivize ATSs to innovate, including
in particular, technology related to trading services to improve the
quality of such services to attract more subscribers. The Commission
believes these effects on competition and innovation would apply to
ATSs trading in crypto asset securities that are NMS stocks in the same
manner that they do to ATSs that trade non-crypto asset securities.
---------------------------------------------------------------------------

    \412\ See id.
---------------------------------------------------------------------------

    As discussed in the Proposing Release,\413\ the public disclosure
of Form ATS-N would also result in market participants redirecting
their trading interest away from ATSs that offer lower quality trading
services compared to other ATSs, which could result in these ATSs
earning less revenue. If the loss in revenue causes these ATSs to
become unprofitable, they might choose to exit the market. The
Commission believes these effects would apply to ATSs trading in crypto
asset securities that are NMS stocks in the same manner that they do to
ATSs that trade non-crypto asset securities.
---------------------------------------------------------------------------

    \413\ See id.
---------------------------------------------------------------------------

    As discussed in the Proposing Release,\414\ the public disclosure
of previously nonpublic information regarding innovative operational
facets of a New Rule 3b-16(a) System that trades NMS stock could
adversely impact competition in the market for trading services and
also reduce the incentives for these trading venues to innovate. As in
the Proposing Release, the Commission believes that the risk of these
adverse effects occurring would be low, because the information
disclosed on Form ATS-N is not likely to include detailed enough
information regarding operational facets or innovations such that the
public disclosure would adversely affect the competitive position of
the disclosing ATS. To the extent that any crypto asset security is an
NMS stock, the Commission believes that these effects would apply as
described in the Proposing Release to market participants wishing to
trade such a security.
---------------------------------------------------------------------------

    \414\ See id. at 15638.
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    As discussed in the Proposing Release,\415\ although the Commission
acknowledges that some NMS stock ATSs could restructure their
operations to be non-ATSs to avoid being subject to the public
disclosure of Form ATS-N, the risk of this occurring may be mitigated
because the proposed amendments to Rule 3b-16 may make it difficult for
an ATS, including one that trades crypto asset securities, to
restructure their operations to be non-ATSs.
---------------------------------------------------------------------------

    \415\ See id.
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ii. Regulation SCI
    The Commission believes that the requirements imposed by Regulation
SCI may not have a significant adverse effect on competition in the
market for crypto asset security trading services, or on market
participants' trading costs in the market for crypto asset securities.
    As discussed in the Proposing Release,\416\ the Commission believes
that the compliance costs imposed by Regulation SCI may not have a
significant adverse effect on competition among SCI ATSs, non-SCI ATSs,
and non-ATS venues in the NMS stock market due to mitigating factors.
If SCI ATSs pass on the compliance costs to their subscribers in the
form of higher fees, SCI ATSs would lose order flow or their
subscribers to other, non-SCI ATSs and non-ATS venues with lower fees.
Adverse competitive effects, however, would be mitigated because an SCI
ATS would likely have more robust systems, fewer disruptive systems
issues, and better up-time compared to non-SCI ATSs. Furthermore, any
adverse competitive effect may be minor if an SCI ATS is large and has
a more stable and established subscriber base than other ATSs and non-
ATS venues. The Commission expects these effects to apply to ATSs
trading in crypto asset securities that are NMS stocks in the same
manner.
---------------------------------------------------------------------------

    \416\ See id.
---------------------------------------------------------------------------

    As discussed in the Proposing Release,\417\ the compliance costs
associated with participating in business continuity and disaster
recovery plan testing would affect competition among subscribers of SCI
ATSs and also would raise barriers to entry for new subscribers.
Because some subscribers would incur compliance costs associated with
Rule 1004 and others would not, it would adversely impact the ability
for those subscribers of SCI ATSs to compete. The Commission expects
these effects to apply to ATSs trading in crypto asset securities that
are NMS stocks in the same manner that they apply to ATSs that trade
non-crypto asset securities, but as in the Proposing Release, the
Commission lacks sufficient information to estimate the extent of
impact on competition. If larger subscribers of SCI ATSs already
maintain connections to

backup facilities including for testing purposes, the adverse impact on
competition would be mitigated because the incremental compliance costs
associated with the business continuity and disaster recovery plan
testing requirements under Rule 1004 would be limited for those larger
subscribers. The Commission believes that, in the market for crypto
asset securities as in the market for non-crypto asset securities, new
subscribers are less likely to be designated immediately to participate
in business continuity and disaster recovery plan testing than are
existing larger subscribers because new subscribers might not initially
satisfy the ATS's designation standards as they establish their
businesses.
---------------------------------------------------------------------------

    \417\ See id.
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    As discussed in the Proposing Release,\418\ it is difficult to
estimate the costs of Regulation SCI for third-party vendors that
operate SCI systems or indirect SCI systems on behalf of SCI ATSs. If
Regulation SCI imposes compliance costs on such vendors, the compliance
costs would affect the competition among third-party vendors in the
market for SCI systems or indirect SCI systems. If the costs associated
with Regulation SCI for third-party vendors outweigh the benefits of
continuing to operate SCI systems or indirect SCI systems on behalf of
SCI ATSs, these third-party vendors would exit the market for SCI
systems or indirect systems. In this respect, Regulation SCI would
adversely impact such vendors and reduce the ability for some third-
party vendors to compete in the market for SCI systems and indirect SCI
systems, with attendant costs to SCI ATSs. If this happens, SCI ATSs
would incur costs from having to find a new vendor, form a new business
relationship, and adapt their systems to those of the new vendor. SCI
ATSs might also elect to perform the relevant functions internally. If
the current third-party vendors are the most efficient means of
performing certain functions for SCI ATSs, and to the extent that any
third-party vendor exits the market, finding new vendors or performing
the functions internally would represent a reduction in efficiency for
SCI ATSs. The Commission expects these effects to apply to ATSs trading
in crypto asset securities that are NMS stocks, and their vendors, in
the same manner that they apply to ATSs that trade non-crypto asset
securities.
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    \418\ See id.
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b. Efficiency and Capital Formation