The US Securities and Exchange Commission (SEC) is considering an extension of its regulatory reach, triggering a widespread backlash from the crypto industry as the agency looks to include decentralized finance (DeFi) within its purview. The SEC’s April amendment proposal aims to modernize the securities regulator’s approach to evolving markets and has been met with significant resistance, including allegations of overreach and potential infringement on First Amendment rights.
According to the DeFi Education Fund, a lobbying group, the amendment could effectively result in a “blanket de facto banishment of DeFi from the United States.” The group points to confusion and concerns stemming from the actions and words of the commission and agency personnel. The proposal suggests regulating communication protocol systems, which facilitate transactions between buyers and sellers of securities, as exchanges due to their similarity in function.
SEC Chair Gary Gensler has previously argued that investors in crypto markets must be granted the same protections offered by securities laws for other markets. However, the DeFi Education Fund’s letter claims that DeFi protocols “intuitively possess none of the defining hallmarks of stock exchanges,” and the proposal could potentially sweep third-party and utility service providers into the exchange regulatory regime, encompassing aspects such as messaging services and electricity supply to platforms.
Cryptocurrency investment firm Paradigm has defended decentralized exchanges (DEXs), which do not possess the centralized management typically associated with securities regulation. The company cites the recent SEC enforcement action against Coinbase for failing to register as a securities exchange as an example of the impossible demands the SEC is placing on the industry. Paradigm asserts that DEXs are being forced into a similar untenable position, arguing that the definition of “exchange” in the proposal is so far-reaching that it could include entities wholly unlike exchanges.
Furthermore, Coin Center, a research group supporting the cryptocurrency movement, has warned that the proposal could threaten the freedom of coders who create and publish software, including those advocating for political positions. Coin Center highlights the vagueness and scope of the proposed standard, which could provide the SEC with near limitless discretion to select targets for enforcement and potentially harm the open-source software community.
Overall, the SEC’s proposal to expand its regulatory oversight over the DeFi sector has drawn significant opposition and concern from cryptocurrency advocates. Various voices within the industry argue that such an extension of regulatory reach may not only violate constitutional rights but could also hamper innovation and growth in the burgeoning DeFi space.
Source: Coindesk
