Good morning, and welcome to Protocol Fintech. This Monday: the SEC makes a move on DeFi, SWIFT action, and Hester Peirce on regulating code.
Off the chain
Bank runs in Moscow. Armies funded by DAOs. Avocado inflation. This year’s off to a chaotic start. The jitters over cutting Russian banks off from SWIFT, which Western powers seemed to overcome this weekend, were roasted on Twitter as a sign of cowardice. But maybe it was just caution. Our modern financial system is threaded together delicately. No one quite knows what happens when we start pulling it apart, even if the exigencies of war require it.
— Owen Thomas (email | twitter)
The SEC’s big DeFi move
Gary Gensler has been talking about taking on the crypto industry since he started last April. Now he’s getting down to business. The SEC is taking on the crypto industry in a way that could have far-reaching implications, particularly for DeFi, by expanding the agency’s regulatory authority over decentralized trading systems. The potential mechanism is a rule quietly proposed in January that would expand the definition of an “exchange” to include “communication protocol systems.”
This could be the SEC’s big move on crypto. The industry is taking notice.
- “It’s the biggest, most profound rule-making the SEC has ever had,” said Nicholas Losurdo, a partner at law firm Goodwin who previously worked at the SEC. “It has the ability to sweep in a lot of DeFi and crypto, whereas now they don’t have jurisdiction.”
- The comment period on this proposal is still open, but some crypto industry officials are concerned enough that they’ve called on the SEC to extend its comment period to 90 days so that more industry participants can give comments.
- The proposal could “expand SEC authority over spot digital asset markets and peer-to-peer decentralized networks in ways not publicly mentioned or discussed in the Proposal,” Michelle Bond, CEO of the Association for Digital Asset Markets, which represents Galaxy, FTX, Paxos and others, wrote to the SEC.
DeFi players should take note. This change in definition could mean regulating not just centralized crypto entities but even decentralized finance protocols, according to Losurdo.
- To be clear, the 654-page proposal does not mention crypto or DeFi. But it makes key changes, such as changing the definition of an “exchange function” to bringing together people who interact, instead of just “orders” as it was before.
- This broadening of the scope of what an exchange is could pull in a range of crypto products, Losurdo said, since the SEC document says that it applies to “trading any type of security.” And Gensler has been clear that he believes that many digital assets are in fact securities.
- Any person or group working on a DeFi protocol — which could mean a wide range of contributors, since the projects are typically open source — might…
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