Securities and Exchange Commission Chairman Gary Gensler is now looking closely into the decentralized finance (DeFi) industry and its decentralized exchanges (DEXs).
Earlier this month, the SEC filed its first unregistered security lawsuit against a DeFi development firm.
What Happened: According to the Wall Street Journal report, Genslersuggested that some DeFi projects have features that make them look like the kind of entities the SEC is tasked with overseeing.
He believes platforms that reward participants with tokens or similar incentives could be classified as an activity that should be regulated despite their decentralization.
The SEC Chairman pointed out 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."
Furthermore, such projects usually also feature "some incentive structure for those promoters and sponsors in the middle of this.”
As Benzinga explained in a recent report, the SEC made it very clear that slapping the DeFi label on a project and hoping to avoid regulation does not work.
Why It Matters: While Gensler said that the SEC may attempt to regulate some entities despite their decentralization, in some cases, enforcement may end up being near impossible.
If no company exists and all that there is to a DeFi protocol is a set of smart contracts deployed on a blockchain by a group of anonymous developers scattered around the world, there is very little that the SEC can do short of attacking the blockchain itself.
This is where the decentralization of the underlying blockchain — most of DeFi projects are hosted on Ethereum(CRYPTO: ETH) — comes into play.
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