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SEC Says DeFi Platforms Must Comply With Securities Law

The SEC has said it ‘already’ views crypto platforms as exchanges.

U.S. Securities and Exchange (SEC) Chairman Gary Gensler has cracked down on crypto again, inflaming a tense regulatory landscape. On April 14, the SEC published a press release revisiting plans to redefine ‘exchange’ to include ‘crypto asset securities’, including broader DeFi systems. The release states that the Commission “already” views crypto trading platforms as exchanges, so they must comply accordingly.

DeFi eliminates financial intermediaries by using decentralized networks to verify and process transactions. While this has its benefits, the decentralised nature of DeFi makes regulation and compliance a difficult and complicated matter.

Read more: What is DeFi? | The Basics

SEC Chair Gary Gensler said: “I believe this supplemental release will help address comments on the proposal from various market participants, particularly those in the crypto markets. 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.”

He added: “Investors in the crypto markets must receive the same time-tested protections that the securities laws provide in all other markets.”

If the SEC were to change the definition of “exchange” to include DeFi and crypto, it would mean that platforms operating in the DeFi and crypto space would be subject to the same regulatory requirements as traditional financial exchanges such as the NYSE. This would likely include registering with the SEC, complying with stricter anti-money laundering (AML) and know-your-customer (KYC) regulations, as well as meeting other requirements related to investor protection.

The consequences of this would depend on how it’s implemented and enforced, but the proposed redefinition is a double-edged sword.

On one hand, redefining DeFi could lead to increased investor confidence and legitimacy for the DeFi and crypto space – particularly for traditional investors who are still on the fence about cryptocurrency. It could also help protect investors from fraudulent activities and bad actors in the industry.

Yet, treating DeFi systems as exchanges ultimately stifles and undermines the decentralised nature of a blockchain network.

By nature, DeFi transactions are peer-peer, meaning person A can transact with person B without C’s approval or oversight. Subjecting the DeFi ecosystem to a centralised regulatory body such as the SEC by redefining it as a ‘traditional exchange’ runs the risk of undermining the very structure that underpins it.

It also misses a major opportunity to build a new set of regulations that protect investors in a market that’s new and rapidly developing. Applying the existing rules of centralised trading to decentralised trading and hoping for the same result – i.e. investor protection and market growth – may be a futile effort.

The smart contracts that underpin DeFi present a host of new challenges and opportunities that traditional financial agreements do not.

The SEC’s aim is to protect investors, but for how long will the ‘time-tested’ protections of centralised finance remain relevant in a decentralised financial system? I can call my cat a dog, but that doesn’t mean she’ll bark.

Disclaimer: CryptoPlug does not recommend that any cryptocurrency should be bought, sold, or held by you. Do conduct your own due diligence and consult your financial advisor before making any investment decisions.

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