SEC Has Long Road Before DeFi Regulatory Framework Is Ready

The Securities and Exchange Commission (SEC) has its eye on the decentralized finance (DeFi) space but has yet to figure out how to develop a regulatory framework, according to media reports on Friday (Aug. 20).

SEC Chairman Gary Gensler told the Wall Street Journal that some DeFi schemes have the characteristics of systems that would fall under the agency’s oversight.

He said that the decentralized aspects implied by DeFi are “a bit of a misnomer” because some parts of the transactions are actually “highly centralized.”

See also: SEC Chair Gensler Wants More Crypto Oversight Authority

Developers have argued that DeFi transactions operate automatically, therefore no oversight authority is necessary. And although the SEC has said that some cryptocurrencies are decentralized enough to sidestep oversight, when participants are rewarded with incentives, that crosses over into regulatory territory.

“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,” Gensler told WSJ. “There’s some incentive structure for those promoters and sponsors in the middle of this.”

SEC commissioner Hester Peirce — who has the nickname “Crypto Mom” — told participants at an event held by the Chamber of Digital Commerce, that the SEC, like other agencies, is “struggling to get their arms around” DeFi.

She said the SEC’s successful case against Blockchain Credit Partners was not actually an incident of decentralized finance. The fraudsters used the term DeFi to cover up a centralized duplicitous campaign, MarketWatch reported. 

See also: SEC Brings Charges In First Case Using DeFi Tech; Alleged $30M Scheme

The SEC should hand down straightforward guidelines on how DeFi projects should operate without breaking the agency’s laws. But since the SEC has not developed a framework for centralized projects, creating a framework for DeFi is likely not something that is going to happen in the near future, Peirce said, per MarketWatch.

See also: SEC’s Peirce Says Clear Crypto Regulations Are A Must

Peirce lauded Gensler for his grasp of crypto, but they differ in how to approach regulating new technologies. 

“He sees that he doesn’t have a federal regulatory structure, then we should build one for it,” she said, per MarketWatch. “But I would say, we shouldn’t assume that we have to build a federal regulatory structure for everything.”