Apr. 24, 2023
I am writing to express my strong opposition to the SEC's proposal to amend the definition of an exchange under Exchange Act Rule 3b-16 and related changes to Regulation ATS. I agree with Commissioner Peirce's dissenting statement that the proposal would stifle innovation. The proposal fails to recognize the potential benefits of DeFi platforms for innovation and efficiency. DeFi platforms offer novel ways of creating and transferring value without intermediaries, using smart contracts and blockchain technology. They enable greater, configurable transparency and interoperability by default, and if set up in a sensible framework, eliminate much of the reasons why regulations must exist in the first place. Rather than attempting to force DeFi platforms into clearly incompatible regulatory frameworks, the Commission should work with other regulators to develop appropriate and flexible standards that can accommodate its evolution. The onus should be on the government bodies to enable feasible compliance to foster innovation, as opposed to shoehorning innovation into outdated frameworks and thereby risk losing competitive edge in an emerging field. For example, recent advances in zero-knowledge proof cryptography have unlocked new ways for the government to help decentralized platforms comply with know-your-customer (KYC) regulations, which are often cited as a major challenge for DeFi protocols. Zero-knowledge proof credentials can allow users to prove certain attributes about themselves without revealing any personal information. This way, users can prove their eligibility for certain services or transactions without compromising their privacy or security. One example of how zero-knowledge proof credentials can be used is Microsoft's Zero-Knowledge Proof Credentials framework, which is based on open standards and protocols. The framework allows users to obtain verifiable credentials from trusted issuers, such as governments or banks, and present them to verifiers, such as service providers including DeFi platforms, using cryptographic proofs that preserve privacy. The framework also allows issuers and verifiers to define their own policies and requirements for issuing and verifying credentials, as well as revoking them if necessary. The framework can be used for various purposes, such as citizenship verification, age verification, credit history verification, income verification, etc. To illustrate the power of such zero-knowledge proof credentials, I reiterate the privacy aspect through an example. Such a cryptographic proof can be constructed to ONLY contain general statements and quite literally nothing else, statements such as: "I am a US citizen; I am not under sanctions; I am not barred from owning securities; I am over the age of 18; (....)". All of these statements in the proof would be definitively verifiable as being TRUE or FALSE by the verifiers in this proof credential framework, even though the verifiers don't receive the person's passport, name, date of birth, or any data other than the statements themselves and the associated cryptographic proof. Moreover and equally as importantly, the proof can be constructed in a way that prevents the issuer from tracking the activities of the person who verified him/herself, thereby preventing mass surveillance and government overreach. The user would still be able to (and may be lawfully required to) create verifiable account statements on demand or periodically, for example for taxation purposes. The Proof Credentials framework demonstrates how the government can help provide ways for DeFi platforms to comply with KYC regulations without imposing undue burdens or constraints on them. The Commission should collaborate with other regulators and industry participants to explore such solutions and support their adoption. In conclusion, I strongly urge the Commission to withdraw its proposal and adopt a more balanced and forward-looking approach to regulating DeFi platforms. The Commission should not stifle innovation with an inflexible and expansive interpretation of the definition of an exchange, but rather foster innovation with appropriate and adaptable standards that reflect the realities and possibilities of new technology. Thank you for your consideration of my views.