DeFi regulation is making headlines again as the crypto industry and Wall Street disagree over the proposed “innovation exemption” for tokenized assets.
On April 1, a DeFi advocacy group, the DeFi Education Fund (DEF), wrote to the SEC, saying decentralized protocols should not be “misclassified as intermediaries” like traditional centralized exchanges.
Ayan Dow, Head of Legal at DEF, added:
DeFi tools that provide liquidity or operate autonomously do not perform exchange functions, and neither the technology nor its developers should be regulated as exchanges.
According to the advocacy group, any non-custodial request does not fall within the legal definition of an intermediary or exchange. In addition, rank developers as intermediaries, and yet they do not control the “non-custodial platforms” they have built, this would impose a crushing regulatory burden on them.
As such, the advocacy group insisted that any suggested scope of DeFi regulation should exclude disintermediated software, automated market makers (AMMs), smart contracts, and unchecked developers.
Wall Street opposes DeFi legal exemption
The DEF letter was also a response to SIFMA (Securities Industry and Financial Markets Association). The umbrella group TradFi recently argued that the SEC should regulate AMMs, citing the risk to investor protection.
According to SIFMA, the SEC should regulate AMM and DeFi platforms based on their functions supporting the trading of tokenized securities. And not according to whether they are decentralized, as DeFi supporters propose.
SIFMA believes that the Commission should maintain technological neutrality in regulating marketing authorizations based on their market function rather than their protocol architecture.
SIFMA’s position echoed that of Citadel Securities. Last year, Citadel called for strict regulation of DeFi platforms that manage tokenized securities.
SIFMA and Citadel’s opposition to unregulated DeFi could be real concerns, given the scams and blowouts seen in the sector in the past. For Wall Street, compliance should apply to anyone handling tokenized securities.
However, Citadel makes most of its revenue as a centralized intermediary, particularly for retail platforms like Robinhood. As a result, DEF views Wall Street’s opposition as motivated by the potential disruption of DeFi technology (cutting out middlemen) for its business interests.
It remains to be seen how the SEC will respond to these competing interests while continuing to support innovation in the years to come.exemption framework for tokenized securities.
Final Summary
- Advocacy group DeFi Education Fund (DEF) has opposed SIFMA’s efforts to regulate AMMs and other non-custodial DeFi platforms.
- However, SIFMA claims that most “decentralized” platforms present risks when it comes to investor protection.
