Oct. 21, 2023
The proposed expansion of the definition of "exchange" under securities laws to encompass certain DeFi systems could pose significant dangers to innovation and consumer access in cryptocurrency markets. While regulatory oversight has benefits, the SEC underestimatesthe challenges decentralized and autonomous DeFi protocols would face attempting to comply with requirements like broker-dealer registration, Regulation ATS, and Fair Access rules. These were designed for centralized intermediaries, not emergent DeFi networks with no central operator. Forcing DeFi protocols into a flawed regulatory regime could perversely incentivize more centralization, undermining DeFi's core value of trustless peer-to-peer finance. It could also restrict U.S. consumer access to financial tools that increase efficiency and inclusion. The SEC should reconsider applying securities frameworks designed for intermediaries to decentralized public software. Overly burdensome regulations could severely restrict DeFi development and drive innovators overseas. This could put U.S. leadership in blockchain technology at risk. Rather than shoehorning DeFi into unsuitable securities laws, the SEC should foster U.S. innovation by working with Congress, CFTC, and industry to develop an adaptable DeFi oversight regime focused on sophistication, transparency, consumer protection, and privacy. Knee-jerk application of rigid securities laws could quash DeFi innovation before realizing its potential to expand financial access. The SEC must carefully balance oversight with avoiding regulatory overreach into this nascent technology. Sent with Proton Mail secure email.