SEC Commissioner Caroline Crenshaw has published a “Statement on DeFi Risks, Regulations, and Opportunities” on November 9, advising decentralized finance platforms to contact them.
In it, she acknowledged that crypto is now part of the vernacular, whether on news, social media, entertainment, and in investment portfolios.
In an effort to clarify the regulatory status of DeFi in the U.S., the report stated that many DeFi products closely resemble those in the traditional financial marketplace. In late August, the SEC partnered with blockchain analytics firm AnChain.AI to monitor the DeFi space.
DeFi Risk and Reward
Crenshaw stated that although there are many warnings about the risks associated with DeFi, it suffers structural limitations due to it being unregulated.
“DeFi participants’ current “buyer beware” approach is not an adequate foundation on which to build reimagined financial markets.”
She added that the SEC is one of many departments that have jurisdiction over DeFi and particularly securities, but no DeFi platform has yet to register with the regulator. Therefore, participants remain unprotected by any legal framework that applies to traditional finance.
Crenshaw encouraged DeFi operators to reach out to the Commission’s “FinHub” for expert advice on where they stand with regards to regulations, adding, “It is my understanding that FinHub has never refused a meeting, and their engagement is meaningful.”
She stated that enforcement is not the preferred path, referring to the SEC’s cease-and-desist order on Blockchain Credit Partners in August. The regulator would prefer that more projects voluntarily comply with regulations, though what they would have to comply with was not detailed.
There are two primary structural hurdles, Crenshaw pointed out; a lack of transparency and pseudonymity. She described the former as creating a “two-tier market” whereby professional investors and insiders “reap outsized returns.” In contrast, retail investors take more risks, get worse pricing, and are “less likely to succeed over time.”
This has been the case for a number of projects that have had major VC investments and are now governed by these whales, which hold most of the tokens.
A Long Way to Go
Overall, the sentiment was positive in that the SEC is willing to work more closely with the emerging DeFi sector to help it mature. However, with actual regulatory requirements still clouded and lacking clarity, there is a long way to go.
Crenshaw concluded that the agency had been actively engaged in helpful discussions with DeFi experts, and the door remains open, but there were no promises of an easy or quick process.
At the time of writing, there was a near all-time high of $178 billion total value locked in DeFi, according to Dappradar.