The world of decentralized finance gave a collective shudder this weekend upon learning the Securities and Exchange Commission wants to amend a regulation that defines exchanges. This is the third time the SEC has tweaked its proposed amendment, and the latest version is aimed directly at DeFi platforms.
The long and short of it is that SEC Chair Gary Gensler wants to force DeFi projects such as Uniswap—which lets users swap tokens using a decentralized protocol—to register and operate as a Nasdaq-like exchange. He made this clear during prepared remarks on Friday. “These platforms are acting as if they have a choice to comply with our laws. They don’t,” Gensler clucked.
Where to begin? First, this isn’t a surprise given the burn-it-all-down approach Gensler has taken to regulating the crypto industry in the months after FTX collapsed. Given that DeFi embodies most of the qualities that crypto haters loathe—notably a global, decentralized business model where it’s unclear who is in charge—you knew Gensler would make a move sooner or later.
The question is, What happens next? The crypto world has reacted with incredulity at Gensler’s comments, balking at the notion that decentralized software platforms can be stuffed into a regulatory framework designed for old-school stock exchanges. In a smart thread, attorney Jason Gottlieb made the case that Gensler is not evil or stupid, but has failed to realize that crypto and DeFi represent a new paradigm that requires a brand-new regulatory model. He invokes the familiar analogy of Model-T Fords arriving in a legal regime designed for horses.
Meanwhile, Gensler’s fellow SEC commissioner and longtime crypto ally, Hester Peirce, claimed the chair’s new gambit—which passed by a 3–2 vote—“sends a message that we are uninterested in facilitating innovation and competition in the financial markets and instead seek to protect incumbents.”
As for the DeFi industry, an attorney told me that major players are ready to sue the SEC on the grounds it has sought to expand the definition of “exchange” in a high-handed, arbitrary fashion. They added that DeFi companies can’t sue for now—they have to wait until the new definition becomes law—but when they do, they will be able to file directly with an appeals court like the Fifth Circuit. If that comes to pass, the attorney told me, the crypto world has an excellent chance of winning because, on the DeFi file especially, Gensler has finally overplayed his hand. The attorney was convinced that the Supreme Court’s growing skepticism of letting agencies run their show—as evidenced by a 9–0 decision last week—will lead the justices to bench-slap the SEC.
We’ll see. I agree Gensler is indeed on shaky ground when it comes to administrative law, but the crypto industry must also realize it is viewed with dislike and mistrust by many people—including more than a few judges, I suspect.
Jeff John Roberts
jeff.roberts@fortune.com
@jeffjohnroberts
