A U.S. Securities and Exchange Commission (SEC) official is offering clarity on decentralized finance (DeFi) while weighing its benefits and risks.
In a statement, SEC Commissioner Caroline A. Crenshaw says that DeFi offers notable opportunities and advantages, but aspects of the sector remain riddled with confusion.
“DeFi presents a panoply of opportunities. However, it also poses important risks and challenges for regulators, investors, and the financial markets. While the potential for profits attracts attention, sometimes overwhelming attention, there is also confusion, often significant, regarding important aspects of this emerging market.”
Crenshaw says that investing is at the “core of DeFi activity” and one of the benefits participants enjoy is the ability to transfer assets “quickly and easily.”
“Developers have also constructed smart contracts that offer individuals the ability to invest, to lever those investments, to take a variety of derivative positions, and to move assets quickly and easily between various platforms and protocols. And there are projects that show a potential for scalable increased efficiencies in transactions speed, cost, and customization.”
The SEC commissioner says that relying on investors to conduct the proper due diligence before investing in DeFi is inadequate.
“Accordingly, DeFi participants’ current ‘buyer beware’ approach is not an adequate foundation on which to build reimagined financial markets. Without a common set of conduct expectations and a functional system to enforce those principles, markets tend toward corruption, marked by fraud, self-dealing, cartel-like activity, and information asymmetries. Over time that reduces investor confidence and investor participation.”
Crenshaw says that some DeFi ecosystems ought to be under the SEC’s jurisdiction and developers should therefore seek clarification from the regulator if they are unsure about the status of their project.
“A variety of DeFi participants, activities, and assets fall within the SEC’s jurisdiction as they involve securities and securities-related conduct. But no DeFi participants within the SEC’s jurisdiction have registered with us, though we continue to encourage participants in DeFi to engage with the staff.
Importantly, if DeFi development teams are not sure whether their project is within the SEC’s jurisdiction, they should reach out to our Strategic Hub for Innovation and Financial Technology… or our other Offices and Divisions, all of which have experts well-versed in issues relating to digital assets.”
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