How might this affect the upcoming XRPL AMM?

The crypto community has lamented the US SEC’s newly adopted rules for the crypto industry, which could cause a problem for liquidity providers over protocols such as the upcoming XRPL AMM.

The US Securities and Exchange Commission (SEC) on February 6 adopted a set of rules that will mandate liquidity providers to properly register with the agency when dealing in assets considered securities or government bonds, including cryptocurrencies.

The rules, which passed by a 3-2 vote of the SEC staff, also apply to the decentralized finance (DeFi) sector, with implications for liquidity providers on automated market makers (AMM), according to the SEC’s 247-page document .

It is necessary to mention it the US SEC first proposed this set of regulations in March 2022, clearly revealing an intention to curtail the DeFi sector. The concept has received criticism from crypto industry leaders, who have argued that the decentralized nature of DeFi protocols makes it unfeasible.

The recent development indicates an implementation of the rules despite the initial uproar. Based on the new rules, a certain category of liquidity providers will have to register with the SEC on any AMM agency if the assets they deal with are considered securities.

This can pose an extra challenge, as even centralized exchanges have had a difficult time registering with the SEC due to a lack of clarity. For this reason, Coinbase, which sued the SEC last year dragged the bond regulator to courtwhich demands a clear rulemaking policy.

SEC Commissioner Hester Peirce, who voted against implementing the new rules, questioned who should register with the agency: the individual who writes the software code of the AMM or the individuals who deposit their assets to serve as liquidity providers.

?Very important exchange from today’s SEC hearing where SEC staff claim that the new broker-dealer rule will make all LPs in AMMs into securities dealers with a registration requirement. Paraphrase of @HesterPeirce’s incisive questioning of staff below: ?

Staff: “AMM is…

— _gabrielShapir0 (@lex_node) February 6, 2024

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In a rather ambiguous statement, the SEC staff suggested that the individuals who “use the software to deal with cryptocurrencies” would have to register. Peirce argued that the regulatory uncertainty surrounding the crypto industry will make it difficult for real compliance.

Does this affect LPs on the XRPL AMM?

The XRP community has particularly reacted to the recent move, considering the fact that the XRP ledger (XRPL) is about to welcome its own AMM.

$XRP has been trading for 8 years. SEC says it is a security.

XRPL gets NFTs. SEC says they are securities.

XRPL gets AMM. SEC says AMM MPs must register.

Meanwhile, $ETH is over there with its ICO, whales in disguise, links to China, hack scandals, backtracking… the list goes on… endddd pic.twitter.com/AKzgcwtDQU

— CryptoArsenal (@_CryptoArsenal) February 6, 2024

This upcoming AMM, ushered in with the adoption of the XLS-30D amendment, will allow XRP holders to earn passive income by serving as liquidity providers. In addition to XRP holders, the AMM feature will also cater to holders of other assets on the XRPL with its multiple instances.

Reacting to the development, pro-crypto attorney Bill Morgan implied that the regulations could have a negative impact on some entities responsible for liquidity provision in the crypto scene.

“I wonder which entities in the crypto market will be most harmed by this penalization of liquidity provision. Why are the SEC and the vested interests it serves so concerned about liquidity provision? Decentralization of liquidity provision seems to upset some applecarts,” Morgan noted in a post on X.

I wonder which entities in the crypto market will be most harmed by this penalization of liquidity provision. Why are the SEC and the vested interests it serves so concerned about liquidity provision? Decentralization of liquidity provision is likely to upset some applecarts. https://t.co/etbgXsNSEq pic.twitter.com/9prSVPXcCy

— bill morgan (@Belisarius2020) February 6, 2024

However, the rule may not apply to retail liquidity providers on the XRPL AMM and other AMMs in the DeFi scene. According to the SEC’s documentation, the new regulations do not apply to liquidity providers with less than $50 million in assets.

Additionally, with XRP’s current status as a non-security, as decided by Judge Analisa Torres last July, the XRP community pointed out that individuals who provide liquidity for XRP may not need to worry about the new rule set .

Other possible implications

Attorney Morgan also pointed out some other possible implications of the regulations that are getting less attention from the XRP community. Part of the rules broadens the definition of a exchange accommodate centralized and decentralized exchanges.

This move will require centralized and decentralized exchanges to register as an alternative trading system (ATS) or an exchange with the SEC. According to Morgan, this could potentially require the native XRPL DEX to be registered as an exchange.

You forgot the proposed change to the definition of Exchange that could require the XRPL DEX to be registered as an Exchange or ATS https://t.co/F4Yy7k2Obr pic.twitter.com/fPtKjdkgFf

— bill morgan (@Belisarius2020) February 6, 2024

Additionally, the SEC states that entities that contribute liquidity above an incidental level in their regular business activities will be subject to the regulation. In the latest rule, the provision of liquidity alone can now be considered trading activity.

Morgan continued scored to Ripple’s Liquidity Huba product from Ripple that aims to help businesses with their crypto liquidity requirements.

The product connects entities with venues to access their crypto-liquidity. Attorney Morgan questioned whether Liquidity Hub would be affected by the new rule.