DeFi Under Fire: SEC’s Intensified Crackdown Sparks Controversy

Decentralized Finance (DeFi) is facing increased regulatory scrutiny as the Securities and Exchange Commission (SEC) reopens the comment period on proposed amendments to the definition of “exchange” under Exchange Act Rule 3b-16. The proposed amendments were initially put forward in January 2022, and the SEC reopened the comment period in May 2022, which closed on June 13, 2022.

DeFi Future In Jeopardy?

The SEC’s proposal aims to provide “regulatory oversight” of platforms that trade crypto assets to what they called “securities,” including DeFi protocols, which operate on a decentralized, peer-to-peer network. 

According to the announcement, the proposed amendments would subject DeFi protocols and other platforms that trade “crypto asset securities” to additional regulatory requirements, such as registration as national securities exchanges or compliance with reporting and recordkeeping obligations. SEC Chair Gary Gensler commented:

I believe this supplemental release will help address comments on the proposal from various market participants, particularly those in the crypto markets.

In his statement, SEC Chair Gary Gensler further emphasized that many crypto trading platforms already fall under the current definition of an exchange and are thus subject to existing securities laws. Gensler also alleged that investors in the crypto market “deserve the same protections” as those in other markets and that the SEC’s proposed regulations are intended to provide it.

Additionally, Gensler noted that the proposed regulations are subject to public comment and encouraged investors and other stakeholders to provide input on all aspects of the proposal. He emphasized that the SEC is committed to ensuring that the crypto market operates in a “fair and transparent manner” and that these regulations are an important step in achieving that goal.

Per the announcement, once the reopening release is published in the Federal Register, the 30-day comment period will begin. During this period, interested parties can submit comments to the SEC electronically or in writing. The SEC will review and use all comments received to inform any changes to the proposed regulations.

SEC Divided On The Future Of DeFi

In a dissenting statement, SEC Commissioner Hester Pierce criticized the proposed regulations by the Securities and Exchange Commission, arguing that they embrace “stagnation, centralization, expatriation, and extinction” instead of embracing the promise of new technology.

Pierce argued that the proposed regulations would stifle innovation in the crypto market by forcing centralization and discouraging innovation. She also expressed concern that the regulations could urge the expatriation of blockchain innovators as they seek more favorable regulatory environments outside of the United States.

Pierce further criticizes the Commission for dismissing the possibility of practical adjustments to the registration framework, which would allow entrepreneurs to register more easily. Instead, Pierce argues that the Commission responds to entrepreneurs’ good faith with enforcement actions, suggesting that the SEC does not support innovation in the crypto market.

Pierce also criticizes the SEC’s “cavalier” approach to the proposed regulations, which she believes stands in marked contrast to the agency’s approach a quarter-century ago. She suggests that the SEC’s current approach is “uninterested” in facilitating innovation and competition in the financial markets, instead seeking to protect “incumbents.” Commissioner Pierce concluded:

We stretch the statutory definition of “exchange” beyond a reasonable reading to reach a poorly defined set of activities with no evidence that investors will benefit. We do so with an insouciant laugh at the consequences.

As the SEC considers public comments on the proposed regulations, the challenge for the Commission will be to strike a balance between protecting investors and promoting innovation while addressing the concerns of dissenting voices like Commissioner Pierce.

Featured image from Unsplash, chart from TradingView.com