US SEC Boss Gary Gensler Calls to Regulate DeFi Projects

In an interview with the Wall Street Journal on August 19, the US Securities and Exchange Commission chairman Gary Gensler warned that decentralized finance (DeFi) platforms are not immune to oversight by the market regulator.

Gensler went further and said that DeFi projects have features that make them look like the type of entities regulated by the SEC. The SEC chair clarified that DeFi projects that reward participants with valuable digital tokens similar incentives could enter territory subject to the SEC regulation. 

In short, Gensler hinted that the regulator could start regulating DeFi platforms.

In the past, the SEC has been targeting centrally-operated crypto firms that have sold cryptocurrencies, or run exchanges, investment funds, or ICOs.

Despite DeFi platforms being decentralized, with no central entity in charge, Gensler has claimed that such platforms have an organized and transparent set of developers governing each project.

He pointed to individuals involved in the DeFi industry as “promoters” and “sponsors.”

“There’s still a core group of folks that are not only writing the software, like the open-source software, but they often have governance and fees. There’s some incentive structure for those promoters and sponsors in the middle of this.” 

The SEC chairman argued that the term of DeFi is not necessarily accurate, calling it “a bit of a misnomer”. “These platforms facilitate something that might be decentralized in some aspects but highly centralized in other aspects,” Gensler said.

More Investor Protections Needed

This is not the first time that Gary Gensler has called for tougher regulation on DeFi. In the past, the SEC chairman suggested that the decentralized finance landscape could be in the business of selling unregistered securities.

On August 3, Gensler spoke at the Aspen Security Forum, where he said that thousands of crypto assets or tokens are operating as unregistered securities. The SEC chair admitted that currently, there is no adequate investor protection in cryptocurrency.

During that time, Gensler stated publicly that he wants more regulation for exchanges and seeks to cooperate with Congress on that issue. He expressed the desire for Congress to grant the SEC additional powers and resources as it expands its oversight of the cryptocurrency. His speech focused on key areas like tokens classified as securities, stablecoins, DeFi platforms, and financial products tied to crypto, such as exchange-traded funds.

 Gensler joined senators like Elizabeth Warren in calling for more robust consumer protections within the crypto industry.

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DeFi Operations Need to Be Open for Regulation, Says SEC Commissioner

Hester Pierce is on the frontline, advocating for an allowance for legal clarity within the DeFi space and maintaining freedom for it to experiment. In her opinion, this will create a better chance for DeFi to compete fair and square with centralized finance.

DeFi Will Pose A Challenge in Regulation

Hester aired her thoughts at a George Washington University Law School event targeting regulation and the digital economy during the ‘Atomic Trading’ speech.

Earlier this year, she mentioned that the SEC would be taking a hands-on approach when dealing with DeFi. 

The DeFi space has been fast-growing, especially during the coronavirus pandemic. Following suit as other sectors within the crypto space gained increased interest from both retail and institutional investors, DeFi is currently swinging at $35.58B of TVL within its platforms.

Nonetheless, this popularity has created a chance for more foul players to join the game. DeFi and Uniswap scams have been on the rise, leading to significant losses by unsuspecting investors. 

The SEC, among other regulators, believes that the lack of regulations within decentralized finance is the root of all scams. Furthermore, they agree that a well-monitored environment is key to achieving crypto mass adoption.

However, Pierce commented that the decentralized and ambiguous nature of DeFi would pose a significant challenge in the sector’s regulation. At the time, she explained that a regulator’s role would depend on what was to be regulated; in that case, there were many gray areas involved.

An Insistent SEC

Referencing the latest issue they faced after GameStop’s stocks shorting; Pierce explained the tough decisions they have to make in different financial situations. 

At the same time, she expressed DeFi to be an excellent way to test their regulation capabilities in shielding both investors and markets.

Pierce also recognized the advantages that DeFi holds over centralized finance, including democracy, open-source platforms, easier access, faster transactions, technological resilience, and more.

Additionally, she sees the technological advancements within the DeFi space as a breakthrough for the regulatory challenges. That way, the technology will open doors to finding the solution for DeFi regulation. 

Robinhood’s Transaction Settlement

The SEC commissioner recognized Robinhood’s bold move of limiting the trade execution times. Vlad Tenev, Robinhood’s founder, and Citadel Securities founder Ken Griffin took a witness testimony approach pursuing real-time transaction settlements. 

The move comes after the retail traders on the platform experienced a two-day settlement issue due to an influx in GameStop’s stock trading. However, the DTC Settlement Services advises that the ecosystem isn’t ready for immediate settlements. 

Instead, the settlement is currently working in conjunction with asset managers, brokers, and regulators to venture into half a day settlement time. 

Going by the “crypto mom’s” sentiments on Robinhood, fast transaction processing is entirely possible in the crypto space, making it a starting point for finding tools to regulate the digital economy.

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