Crypto industry speaks out against SEC’s attempt to conflate DeFi with centralized exchanges

The crypto industry is staunchly opposed to the SEC’s proposal to lump in DeFi platforms with centralized exchanges and regulate both using the same framework.

The SEC opened a public consultation in April — with a June 13 deadline on a proposal to amend the rules used to identify crypto exchanges and extend them to include any platforms that are designed to connect buyers and sellers of securities.

The industry’s response to the proposal has been overwhelmingly negative.

Crypto lobby group DeFi Education Fund said in a letter sent to the regulator on June 12 that its proposed changes would ultimately result in a “de-facto banishment of DeFi from the U.S.”

The group added:

“The Proposal represents a slapdash and legally troublesome attempt to shoehorn the novel technologies in the crypto asset and DeFi spaces into antiquated and ill-fitting regulatory regimes.”

Advocates and lobbyists argue that the sector cannot be regulated using current regulatory frameworks used for stock exchanges and needs a comprehensive set of new rules.

Furthermore, the industry claims the SEC’s attempt to conflate DeFi with other centralized exchanges is a blatant overreach of its legal powers.

Legal deficiencies

According to DeFi Education Fund, the SEC’s proposal contains “central legal deficiencies” related to misconstruing the Exchange Act as DeFi protocols cannot be conflated with centralized entities because they are fundamentally different in nature.

The group said:

“The Commission is promulgating [the Exchange Act] in an arbitrary and illogical manner without regard to procedural requirements or to the central problems and costs implicated by the Proposal.”

Additionally, DeFi protocols bear none of the “defining hallmarks of a stock exchange,” and any attempt to regulate them using current frameworks could potentially expose service providers like messaging groups and utility companies to SEC rules.

DeFi Education Fund wrote:

“Beyond DeFi, the commission’s proposal has no logical limit and would sweep third-party and utility service providers who contract with exchange providers into the exchange regulatory regime.”

The group further stated that the main issue with the proposal is that the SEC has failed to “clearly, consistently or lawfully address the fundamental question of which crypto assets are securities.”

The lack of clarity around what is or isn’t a security means the new rule could be applied arbitrarily to any entity the regulator deems an exchange.

Crypto research group Coin Center also responded to the consultation and wrote:

“The vagueness and breadth of the proposed standard affords the SEC near unlimited discretion to pick and choose targets for enforcement.”

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