Galaxy Digital Explains Why DeFi Protocols Are Not Exchanges
The major crypto finance firm Galaxy Digital submitted an important clarification to the U.S. regulator: automated market makers (AMMs) in decentralized finance should not be considered exchanges under the law. This could influence how DeFi is regulated in the United States—and whether such protocols should even be required to undergo the complex registration process that traditional platforms must follow.
For everyday users, this matters because if regulators start demanding that DeFi platforms obtain exchange status, many of them will simply stop operating in America. As a result, millions of users would lose access to tools that currently allow them to swap assets without intermediaries, fees, or account registration.
What is an AMM, and how does it differ from an exchange?
Imagine a typical stock exchange—like those on the equity market. There’s a central operator that collects all buy and sell orders, consolidates them into a single “order book,” and ensures trades are executed. That operator also often holds your funds and assets.
An AMM (automated market maker), however, works differently. It consists of a set of rules encoded in a smart contract—a program that automatically executes trade conditions. There’s no central administrator. You exchange tokens directly with a “liquidity pool” rather than through an intermediary with another person. And you yourself hold the private keys to your assets; no one takes them into custody.
Galaxy Digital emphasizes that once such a protocol is launched, it operates independently. Even its creators can’t change the rules or reverse a transaction. It’s like a wind-up clock: you set it once, and it runs on its own, regardless of the watchmaker.
Why the SEC Might Be Mistaken
The U.S. Securities and Exchange Commission (SEC) recently issued guidance proposing criteria for determining whether a DeFi protocol qualifies as an “exchange” or a “broker.” However, Galaxy Digital argues that the regulator’s approach overlooks a key distinction—the lack of centralized control.
In its letter, the company states:
- AMMs do not have a centralized order book;
- Transactions cannot be blocked or canceled (except when the code itself includes such restrictions);
- Smart contracts are open for inspection—anyone can view the pricing algorithms;
- Developers no longer manage the protocol after launch.
If the SEC insists on registering these systems as exchanges, it would create a legal paradox: how do you register something that isn’t managed by anyone?
Key Takeaways
- AMMs are code, not companies. Once deployed, the protocol runs autonomously.
- Users retain full control over their funds, unlike in centralized exchanges.
- DeFi’s regulatory status remains undefined, but attempts to equate it with traditional markets could stifle innovation.
- The transparency of smart contracts makes AMMs more predictable than closed systems.
- Galaxy Digital advocates for sensible regulation that accounts for blockchain’s technical characteristics.
What Does This Mean for Ordinary People?
If regulators decide that every DeFi protocol is an exchange, these services will either leave the United States or become inaccessible to ordinary users. This would deprive people of the freedom to choose how and where they store and trade digital assets. On the other hand, if the approach is flexible—as Galaxy Digital suggests—DeFi could thrive legally, protecting user rights without stifling technological progress.
For now, this is not a ruling but rather the position of one of the largest firms in the crypto industry. Given its influence on Wall Street and its ties to regulators, this perspective could shape future legislation.
— Editorial Team
