This past weekend, news broke that the Securities and Exchange Commission intended to modify a rule defining exchanges, sending a shudder through the decentralized financial community. The SEC has altered its suggested amendment three times, and the most recent change is targeted specifically at DeFi platforms.
The long and short of it is that Gary Gensler, the SEC Chair, wants to require DeFi projects like Uniswap, which allows users to swap tokens via a decentralized system, to register and function as a Nasdaq-type exchange. On Friday, he made this quite plain in his prepared remarks.
“These platforms present themselves as having a choice about adherence to our laws. Gensler laughed. “They don’t.
Where should I start? First off, this shouldn’t come as a surprise given Gensler’s “burn it all down” approach to regulating the cryptocurrency market in the months following FTX’s demise. You knew Gensler would act sooner or later given that DeFi contains the majority of the traits that crypto haters detest, most notably a worldwide, decentralized business model where it’s unclear who is in charge.
The next question is: What takes place? The crypto community has responded to Gensler’s remarks with skepticism, scoffing at the idea that decentralized software systems can be fit into a regulatory structure created for traditional stock exchanges. Attorney Jason Gottlieb argued in an insightful discussion that while Gensler is neither malicious or ignorant, he is unaware that crypto and DeFi constitute a new paradigm that calls for a completely new regulatory regime. He uses the well-known allegory of Model-T Fords entering a legal system intended for horses.
Hester Peirce, a fellow SEC commissioner and a steadfast supporter of cryptocurrencies, asserted that the latest gambit by the chair—which was approved by a 3-2 vote—”sends a message that we are uninterested in facilitating innovation and competition in the financial markets and instead seek to protect incumbents.”
Regarding the DeFi sector, a lawyer informed that big participants are prepared to fight the SEC on the grounds that it has acted arbitrarily and arrogantly in seeking to broaden the definition of “exchange”. They stated that DeFi firms can file immediately with an appeals court like the Fifth Circuit after the new definition becomes law, but they must wait until then before filing a lawsuit. If that occurs, the lawyer assured that Gensler had ultimately overplayed his hand on the DeFi file in particular, giving the crypto world a great chance to prevail. The lawyer was certain that the Supreme Court would bench-slap the SEC as a result of the justices’ growing mistrust of letting agencies handle own affairs, which was demonstrated by a 9-0 ruling last week.
