SEC Commissioners Consider Regulatory Issues Posed by DeFi

At the final event of the SEC's Crypto Task Force roundtable series, SEC Chair Atkins and other SEC commissioners discussed the regulatory issues raised by the advent of decentralized finance ("DeFi"). 

Chair Atkins criticized the previous administration's regulatory hostility toward blockchain participation and welcomed guidance from the staff of the Division of Corporation Finance that clarifies that "voluntary participation in a proof-of-work or proof-of-stake network as a 'miner,' 'validator,' or 'staking-as-a-service' provider is not within the scope of the federal securities laws." However, Mr. Atkins emphasized that such guidance is "not a duly promulgated rule," and that the SEC must "adopt a regulation based on the authority that Congress has given us." He also noted the importance of self-custody, calling it a "foundational American value," and argued that intermediation often imposes "unnecessary transaction costs." He rejected efforts to treat software developers as intermediaries solely for publishing code and praised the resilience of on-chain systems in the face of crises. Chair Atkins also highlighted that he: (i) asked SEC staff to "explore whether further guidance or rulemaking may be helpful for enabling registrants to transact with [self-executing software code] in compliance with applicable law"; (ii) asked SEC staff to consider whether "amendments to the [SEC's] rules and regulations would be better suited to provide needed accommodation for issuers and intermediaries who seek to administer on-chain financial systems"; and (iii) urged adoption of an "innovation exemption" that "would expeditiously allow registrants and non-registrants to bring on-chain products and services to market."

Commissioner Peirce asserted that "[c]ode is protected speech," and thus the SEC "must not infringe on First Amendment rights by regulating someone who merely publishes code on the basis that others use that code to carry out activity that the SEC has traditionally regulated." However, she acknowledged that developers who "operate, administer, or maintain" platforms—especially those taking custody of client assets or making execution decisions for clients—may fall within the SEC's jurisdiction. She warned against "DeFi-In-Name-Only" entities that mimic decentralization to evade regulatory oversight, stressing that regulation should apply based on conduct, not labels. She concluded that the SEC's focus should remain on protecting investors from centralized financial service providers, "not from [investors'] own use of open-source software code...nor from writers of such code."

Commissioner Uyeda likened the SEC’s work on DeFi to "navigating through challenging new terrain." He acknowledged that past SEC approaches to DeFi "discouraged entrepreneurs" and lacked regulatory transparency, but credited the Crypto Task Force with shifting the agency's posture to "embrace[] difficult regulatory questions, and promote[] transparency by engaging with the market participants driving innovation and change." He emphasized that "[h]igh quality regulation takes time," and urged DeFi developers to work with the SEC "towards achieving the best possible outcome." He also stressed that the SEC "should not refrain from engaging in oversight of novel areas simply because it involves thinking outside the existing framework." He also emphasized consideration of the following questions: (i) "In which types of situations do DeFi systems and smart contracts potentially eliminate the need for a financial intermediary and how?"; (ii) "In what situations should DeFi systems be deemed to fall outside the scope of the securities laws?"; and (iii) "What key safeguards are necessary when the securities laws apply to these arrangements?"

Commissioner Crenshaw reflected on the Crypto Task Force roundtables, emphasizing the "markedly diverse set of viewpoints" across the industry. She argued that while the series of roundtables was "billed as a 'spring sprint towards crypto clarity,'" she was "unsure" whether the roundtables identified "much that can be simply or quickly clarified." She emphasized that the market structure, transparency, and retail investor protection issues she raised in her November 2021 article on DeFi "still remain questions today." Commissioner Crenshaw stated that "[w]hen it comes to crypto, it does not appear to me that the SEC is facing problems with ready or easy solutions. What we are facing is heightened expectations of rolling out major changes — quickly— to pave the way for crypto expansion into the capital markets." Finally, she stated that the SEC "need[s] to grapple with the tough questions through the legally sanctioned process of formal rulemaking...with full opportunity for notice and comment and public interest findings."