SEC Commissioner Caroline Crenshaw emphasized both the opportunities and potential risks decentralized finance ("DeFi") poses to investors.
In a statement first published in the International Journal of Blockchain Law, Commissioner Crenshaw provided background on the regulatory landscape for DeFi, the current role of the SEC (noting the many products that resemble securities) and "hurdles" for market participants. She defined the "DeFi" market as including everything from non-fungible tokens to decentralized finance, and said that, while DeFi provides opportunities to investors, it also creates risks. She expressed skepticism that unregulated markets could be generally successful in the absence of compliance controls and disclosure requirements.
Ms. Crenshaw urged DeFi development teams to communicate with the SEC, stressing a need for cooperation between regulators and market participants. While recognizing the SEC's goal was not to prevent all losses or restrict access to investment opportunities, Ms. Crenshaw highlighted the need for all investors to be able to make informed decisions. Ms. Crenshaw identified two issues standing in the way of cooperation: lack of transparency within the DeFi community, and DeFi markets' susceptibility to manipulation by traders hiding their identities. Ms. Crenshaw acknowledged that these issues are seen as benefits to some DeFi investors, but reiterated that the SEC's regulatory regime can bring benefits (e.g., markets less vulnerable to fraud) through greater transparency.
Commentary Steven Lofchie
An invitation for market participants to meet with SEC Commissioners is not meaningful unless the SEC affirmatively gives an indication that a benefit can come from such a meeting. To date, a majority of the SEC Commissioners have failed to acknowledge SEC Commissioner Hester Peirce's proposal to provide a deregulatory path for utility tokens that may have some investment value. Commissioners should respond to that proposal as a sign to market participants that a meeting with them might be worthwhile.
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