Automated Market Makers and the Consistent Application of Securities Market Regulations

Summary

SIFMA provided comments to the SEC Crypto Task Force to highlight key considerations related to the use of automated market makers (“AMMs”) in the trading of tokenized securities and the importance of applying longstanding securities market safeguards in a technology‑neutral manner.

Excerpt

Automated Market Makers (“AMMs”) are blockchain-based trading mechanisms that use pooled liquidity and algorithmic pricing formulas, rather than traditional order books, to intermediate asset trades in decentralized finance (“DeFi”) markets. AMM platforms have experienced significant growth in trading volumes—underscoring their increasing relevance to the digital asset ecosystem. As the Commission evaluates whether and how AMMs may support trading in tokenized securities, the central policy question is not whether AMMs are “decentralized,” but whether the functions they perform align with activities already regulated under the federal securities laws.

SIFMA believes the Commission should maintain technology neutrality by regulating AMMs based on their market function rather than protocol architecture. “Decentralized” execution often shifts—rather than eliminates—core intermediary functions such as order routing, execution, pricing, and custody transfer. Where those functions are present, the corresponding regulatory obligations should apply.

• AMMs as observed in the unregulated crypto markets have many features which are distinctly different from market infrastructure seen in established, regulated securities markets. These features result in weakened investor protections and increased risks to market integrity.
• Some of these features represent design choices by AMM operators, such as price slippage, conflicts of interest for liquidity providers, pseudonymous open trading, lack of market manipulation controls and unclear governance. Others are intrinsic to AMMs, such as lack of dispute resolution and liquidity issues. Any application of AMMs to the trading of tokenized securities would need to address these concerns.
• Regulation of AMM-driven markets for tokenized securities should distinguish between the AMM itself (code which operates a trading model), the organizations which develop markets based on that code (such as foundations and decentralized autonomous organizations (DAOs)), applications used to interface with those platforms (e.g. front ends), and the roles market participants play in supporting AMM-driven markets (e.g. liquidity providers).
• It is critical to consistently apply regulatory requirements to entities whose roles in AMM-driven tokenized securities markets are substantively like exchanges, brokers, market makers, or other regulated functions. While there is a diversity of AMM models, it is possible to clearly identify combinations of services and responsibilities which clearly align with established regulatory roles.

Integrating AMM-based models into securities markets without addressing these gaps would represent a departure from, rather than an evolution of, the investor protection and market integrity standards embedded in U.S. equity market structure.