On Wednesday, SEC Chairman, Gary Gensler said that decentralized finance or DeFi projects are not immune to oversight and rewarding valuable digital tokens to the participants by these projects will be regulated.

DeFi aims at creating a new financial system that is open to everyone and doesn't require intermediaries like the traditional banking system. It relies mostly on cryptography, blockchain, and smart contracts. Smart contracts are the key building blocks on DeFi.

SEC Chairman is now looking closely at DeFi projects that reward participants with tokens or similar incentives, which could be subjected to SEC regulations despite their decentralization. He is also looking forward to help fill regulatory gaps with the help of US Congress by legislating a solution on these projects.

Gensler said that "there’s still a core group of folks that are not only writing the software, like the open-source software, but they often have governance and fees."

He adds, “There’s some incentive structure for those promoters and sponsors in the middle of this.”

Mr. Gensler, who joined the federal agency in April, has doubled down on an effort to look into cryptocurrency projects. Earlier this month, he warned against industry players working outside the government regulations and promised a vigorous attack on illicit activities in the crypto market. His hunt, which was started several years ago to look for cryptocurrency projects that are offering investments with no regulations, is still on. 

“The American public is buying, selling, and lending crypto on these trading, lending, and DeFi platforms, and there are significant gaps in investor protection,” he said.

In an interview with Wall Street Journal, Mr. Gensler termed DeFi as a “misnomer,” noting that these platforms might be decentralized in some aspects but can be highly centralized in certain ways and spoke more broadly about his stand.

DeFi app don’t require users to over hand their digital tokens to crypto exchange to trade and there is also no central authority deciding on the trade. The identity of traders using the platform is unknown, which raises an issue of hacking, money laundering etc as these projects don’t have safeguards against these illegal activities, which is also a major concern for the authorities.

Pavan A

CBW - External Analyst

INDIA