SEC’s Next Regulatory Target: Defi

Peer-to-peer Decentralized Finance (Defi) isn’t getting away from the United States Security and Exchange Commission (SEC). Defi is a comparatively new set of digital assets and an addition to the cryptocurrency family. Due to its decentralized nature, it is highly unregulated. However, the Chairman of SEC, Gary Gensler wants to take in Defi under his umbrella of regulation.

Gary Gensler – chair of the US SEC wants to regulate Defi

Gary Gensler — chairman of the US SEC, stated that Decentralized Finance (Defi) is highly centralized in certain aspects and urged projects working in the sector to register with the SEC. Speaking to the Wall Street Journal on August 19th, Gensler suggested that the decentralized notions implied by the term Defi were “a bit of a misnomer, “while Defi projects are designed to be autonomous platforms that operate without a centralized authority. “These platforms facilitate something that might be decentralized in some aspects but highly centralized in other aspects,” said Gensler.

Gensler calls Defi ‘highly centralized’ and it needs regulation, Source: CryptoSlate

The Decentralized Finance (Defi) project which is usually not decentralized, could be targeted for SEC regulations because of security issues. They are yet to formulate how is the organization going to do that, but it is clear signal projects need to get decentralized if they are not already.

The debate over regulating the Decentralized peer-to-peer financial transaction system is not new. Mr. Gensler recalled that the regulators had debated over this sector around 15 years ago. The software developers of Defi on the other hand argued that they design the system and leave it, as the transactions and operations take place automatically. There is no requirement of any central authority overseeing the transactions. However, the SEC Chairperson, Mr. Gary Gensler suggests this differently.

“There’s still a core group of folks that are not only writing the software, like the open-source software, but they often have governance and fees,” Mr. Gensler said. “There’s some incentive structure for those promoters and sponsors in the middle of this.”

Decentralized Finance platforms don’t require users to register their digital tokens to an exchange to be able to trade. This feature attracts those investors and traders who are reluctant to use exchange platforms in the fear of losing all their assets in the hand of fraudsters and hackers who operate from such exchange platforms. There is also no central authority that points out ‘who’ or ‘what’ in the trading.

NFTs and Defi are proliferating among traders atan alarming rate. Source: Forbes

“Defi projects generally don’t have safeguards against money laundering, or “know your customer” measures in which an exchange confirms the identity of traders using the platform. That also could raise red flags for authorities,” as Gary Gensler said to the Wall Street Journal article that published on August 20.

Earlier this month, the SEC took their first enforcement action against an institution dealing in tokenized Defi. To which, Hester Pierce, the commissioner of the SEC conflicted with her agency.

Read: US SEC Busted Company in Defi Money Market

Hester Pierce colloquially called the “Crypto Mom” said that “ many aspects of Defi are outside the SEC’s purview, noting that a lot of what’s happening in Defi is more about banking than securities, presumably because a significant amount of activity is around borrowing, lending, and to a lesser extent, insurance. Cryptocurrencies such as bitcoin and ether are classed as commodities which is the turf of the CFTC.” — as per the BIS INNOVATION SUMMIT 2021.

The SEC Chair, Gary Gensler had requested Congress to reduce the regulatory gap between the lawmakers and the financial security watchdog to enhance this regulatory framework. He aspires to bring in tighter regulations and Defi is just another project to be superintended.

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