3 - 4 minute read
The U.S. Securities and Exchange Commission (SEC) has proposed a new rule that would expand its regulatory scope to include decentralized finance (DeFi) platforms. The agency argues that the updated rule is necessary to modernize its approach to changing markets and ensure that investors in the crypto markets receive the same protections as investors in other markets. However, crypto industry advocates and lobbyists are pushing back, arguing that the new rule would violate the First Amendment rights of coders and would force rules on services that the platforms need, such as electric companies.
The DeFi Education Fund, a lobbying group, wrote in its comment letter to the SEC that the proposal would “operate as a blanket de facto banishment of DeFi from the United States.” The group argues that DeFi protocols do not possess the defining hallmarks of stock exchanges and that the proposal has no logical limit, potentially sweeping third-party and utility service providers into the exchange regulatory regime. This could include messaging services and utility companies that provide electricity to platforms.
Crypto investment firm Paradigm defended decentralized exchanges (DEXs) that don’t have centralized management. The company argued that the SEC’s newfound definition of “exchange” is so far-reaching that it would encompass entities that are nothing like exchanges. Coin Center, a research group that supports the cryptocurrency movement, warned of the proposal’s danger to those who write and publish software, including the potential for the government to go after coders who advocate for political positions.
The SEC’s proposal suggests that communication protocol systems designed to bring together buyers and sellers of securities perform a similar enough role to exchanges that they should be regulated as such. However, DeFi protocols “intuitively possess none of the defining hallmarks of stock exchanges,” according to the DeFi Education Fund’s letter.
The proposal has sparked concerns about the potential impact on the DeFi industry and the broader crypto market. If finalized, the new rule could force DeFi platforms to comply with SEC regulations, which could stifle innovation and development in the sector. It could also pull key outside services into the SEC’s web, such as messaging services and utility companies that provide electricity to platforms.
The Bottom Line
Traders should closely monitor developments related to the SEC’s proposed rule and the potential impact on the DeFi industry and the broader crypto market. If the new rule is finalized, it could force DeFi platforms to comply with SEC regulations, which could stifle innovation and development in the sector. It could also pull key outside services into the SEC’s regulatory regime, potentially increasing costs and reducing efficiency for market participants.
