15th April 2023 - The SEC and DeFi.

tl;dr

The SEC (Securities and Exchange Commission) has partially clarified its stance on DeFi (Decentralised Finance).

Market Snap

Market Wrap

A period of consolidation with a 30-handle would be welcome but it would not be surprising to see an imminent pull-back to the mid-20s. The recent accumulation of BTC by shrimps might be subject to extreme nervousness in the face of any downturn, possibly exacerbating any sell-off. There is a growing consensus that the crypto winter is behind us and with a halving on the horizon new all-time highs could materialise in short order. It is worth noting that in every crypto bull cycle there have been brief periods of a 50% or so drop in price. Such moves do not invalidate the overall picture, they simply provide buying opportunities that will never be seen again.

Curious Cryptos’ Commentary – The SEC and DeFi

Way back in January 2022 the SEC published a proposal to expand the definition of an exchange to include platforms that use “communication protocols”:

https://www.sec.gov/news/press-release/2022-10

Though not specifically aimed at the crypto industry, these proposals have been criticised as being inadequate and inappropriate, with the claim that cryptos need their own set of regulations.

Gary Gensler, Chair of the SEC, has previously publicly stated that he believes current legislation is fit for purpose with regards to cryptos:

“There’s nothing incompatible in the crypto mkts w/ the securities laws. A goal of our work at the SEC is to bring this field into compliance. That way, investors get the same time-tested protections they get elsewhere in the markets.”

Yesterday, Gary doubled down on this claim:

"Make no mistake: many crypto trading platforms already come under the current definition of an exchange. Most crypto trading platforms meet that definition, regardless of whether they call themselves decentralised.”

Not everyone agrees with him. SEC Commissioner Hester Pierce wrote (https://www.sec.gov/news/statement/peirce-rendering-inovation-2023-04-12):

“Thank you, Mr. Chair. Stagnation, centralization, expatriation, and extinction are the watchwords of this release. Rather than embracing the promise of new technology as we have done in the past, here we propose to embrace stagnation, force centralization, urge expatriation, and welcome extinction of new technology. Accordingly, I dissent.

… No longer does this commission worry that regulatory bullheadedness often produces absurd consequences. Rather, today's commission aggressively expands its regulatory reach to solve problems that do not exist."

Nicholas Losurdo, a lawyer who has previously worked for the SEC expanded on this theme:

"They want to say, 'Our existing rules work, all you need to do is fit within them,' but they don't in many ways, and I think that's another thing that the agency is grappling with."

…

Gary is often portrayed as the pantomime villain by crypto enthusiasts, but on this narrow point I must confess that I am not in agreement.

In the absence of legislative leadership from the lawmakers, he has little choice but to state that existing laws are adequate, regardless of whether he believes that to be true or not. If he claimed the opposite, that would leave cryptos in a regulatory void which would be to no-one’s benefit.

As we discussed on 2nd April 2023 Freeport (https://freeport.app/) has successfully registered with the SEC, illustrating the lie that has become the popular narrative that SEC registration is impossible if you are a crypto focussed business.

I fear that this legislative roadblock has been brought about the increasing politicisation around cryptos stoked by a certain section of the popular press who claim to have a liberal take on life, but whose editorial policy regarding cryptos is untrammelled hostility, whilst seemingly being deliberately misinformed. And that’s not just in the US.