SEC Prepares to Regulate DeFi, Plans to Expand Jurisdiction

SEC Prepares to Regulate DeFi, Plans to Expand Jurisdiction

Despite all setbacks, the SEC is again finding venues to bring DeFi under its regulation. In the latest turn of events, SEC Chairperson Gary Gensler said that the SEC already considers all DeFi platforms as exchanges and therefore wants them to comply with SEC rules and regulations.

However, DeFi platform users think it would be impossible for SEC to make DeFi platforms comply with its rules.

Statements from SEC Chair Gary Gensler

The SEC held an open meeting to set the definition of "exchanges." It had said that the move was aimed at bringing DeFi platforms under the purview of the SEC. The current definition of an exchange is governed by Rule 3b-16 under the Securities Exchange Act of 1934.

What Does the Rule Say?

As per Rule 3b-16 of the Securities Exchange Act, any entity that does the following is an exchange:

  1. Brings together the orders of multiple buyers and sellers of different securities.
  2. Provides a trading place under established methods by which those orders interact with each other.

However, the catch lies in the fact that the certain traded "thing" has to be a security. This is where SEC lacks the ability to enforce its jurisdiction since no cryptocurrency has been termed as security yet. Further, there is a crucial roadblock that checks anything and everything to be called security. The test is called Howey Test and the US Supreme Court has mandated it.

The Ripple vs. SEC case will be crucial in defining whether cryptocurrencies are securities or not.

Reactions from Users, Politicians, and Experts

Crypto users strongly reacted against Gary Gensler's comments. Some users opposed the move, while others asked how SEC would enforce rules and regulations even if it manages to get crypto under its purview.

Further, it would have no jurisdiction outside the USA. This is a major challenge for SEC since most cryptocurrency exchanges, Dapps, and other platforms operate outside the USA. Moreover, several Decentralized Finance platforms do not even have a physical address. It would be a nightmare for authorities to prove on what basis they will regulate them.

In an interview with the famous crypto journalist Laura Shin, Tom Emmer, Congressman and the whip of the Republican Party, said that Gary Gensler acted in bad faith.

What's Next?

SEC Plans to Clampdown on Crypto
SEC Plans to Clampdown on Crypto

The US SEC has a hopeful look towards its case against Ripple Labs, which would decide whether cryptocurrencies are securities or not. Even if it wins, most of the crypto exchanges and DeFi platforms operate outside of the USA, and several do not have any physical addresses. Being able to regulate them does not necessarily mean that SEC would be able to regulate them.

The sole foundation of blockchain technology was aimed at being free from centralized regulation and control.

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