SEC’s Peirce warns regulator is ‘struggling’ with how to approach DeFi

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The burgeoning world of decentralized finance, or DeFi, is home to some of the hottest markets in the crypto sphere, and financial regulators have been eager to let the public know they are watching these spaces closely for fraud and other violations of securities laws.

But dueling statements from Securities and Exchange Commission Chairman Gary Gensler, a Democrat, and Republican Commissioner Hester Peirce on Thursday illustrate that while the agency has talked a big game thus far, it’s far from clear that it has the resources or legal authority to bring order and investor protection to these markets.

Read more: DeFi could revolutionize finance. Can regulators do anything about it?

DeFi comprises countless applications that run autonomously, mostly on the Ethereum network, where users can deposit their digital assets like bitcoin BTCUSD, +2.20% or ether ETHUSD, +1.50% and earn returns, borrow or loan money and even buy and sell derivatives of blue-chip equities like Apple AAPL, +1.02%  and Tesla TSLA, +1.01%.

Gensler argued in interviews with Fox Business network and the Wall Street Journal on Wednesday that many of these projects aren’t actually decentralized, calling the term a “misnomer.”

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

Gensler’s description echoes the case of Blockchain Credit Partners, which the SEC sued earlier this month, charging the company and its owners with illicitly offering unregistered securities and making false and misleading statements about what the proceeds of digital-token sales would be used for.

Peirce, however, argued in at an event held by the Chamber of Digital Commerce on Thursday that Blockchain Credit Partners “is not really a DeFi case,” but a case where DeFi was simply used as a marketing term to mask a centralized, fraudulent operation.

“The SEC has been wading into thinking about DeFi,” she said. “It’s one that we’re, along with many other regulators, struggling to get our arms around.” A truly decentralized financial application whose creators have ceased to exert control over the protocol and do not profit from it present a novel set of problems for the regulator, Peirce argued.

She added that she’d like the SEC to provide explicit guidance on how DeFi projects can be launched and maintained without running afoul of securities laws, but sees little hope, given the SEC has declined to do the same for centralized crypto projects.

Peirce praised Gensler for his understanding of cryptocurrencies, but said the two have different approaches when it comes to regulating new technologies. “He sees that he doesn’t have a federal regulatory structure, then we should build one for it,” she said. “But I would say, we shouldn’t assume that we have to build a federal regulatory structure for everything.”

Peirce also raised the concern that the SEC doesn’t yet have the expertise to create a regulatory framework for cryptocurrencies broadly and DeFi in general. “If we do [create a new structure], we better do it with people who know this space well and understand the differences from the traditional markets that we’re used to dealing with.”

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