Could this new proposal kill DeFi in the US?

The U.S. Securities and Exchange Commission (SEC) has reopened the comment period for a proposal that would target DeFi platforms for regulation as exchanges. Last year, the SEC proposed expanding the definition of “exchange” to capture a wider range of trading activity in the U.S. The updated proposal included DeFi platforms.

In yesterday’s SEC Press Release, Chairman Gary Gensler said the following:

Make no mistake: many crypto trading platforms already come under the current definition of an exchange and thus have an existing duty to comply with the securities laws. Investors in the crypto markets must receive the same time-tested protections that the securities laws provide in all other markets.

Pushback to the Proposal

Crypto industry leaders have been advocating for clear regulations in the US to govern their operations, but they have expressed concerns that the SEC’s stance, which requires them to register and comply with existing securities laws, is not suitable for DeFi platforms.

Even SEC Commissioners are opposed to the proposal. Soon after the publication of the SEC Press Release, Hester Peirce published her dissenting opinion. Peirce highlighted a number of issues with the 170-page document, including that the proposal “articulates confusing and unworkable standards for decentralized activity, participants in that activity, and providers of the underlying technologies, including validators and miners.“

She also noted that the proposal does not properly consider whether compliance is actually possible. In summary, Peirce notes that:

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• The SEC has urged crypto firms to register but none have been able to do so.
• Rules for traditional securities markets may need to be tweaked to accommodate innovative technologies.
• The SEC fails to consider whether decentralized protocols obviate the need for securities law protections.
• The release suggests that decentralized protocols may be driven toward centralization, extinction, or expatriation.
• Those involved in these systems may choose to operate outside the US or exit the market.

The Commission does seem to anticipate that its interpretation will drive decentralized protocols toward centralization, extinction, or expatriation. It blithely acknowledges at one point that those involved in these systems “may instead choose to operate outside the U.S. or exit the market.

Hester Peirce, SEC Commissioner

If Commissioner Peirce’s concerns are valid, the introduction of this amendment could potentially make DeFi unworkable in the US.