A "Manage Cyber Risks" sign outside the U.S. Securities and Exchange Commission headquarters in Washington, D.C., U.S., on Wednesday, Feb. 23, 2022
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The SEC wants to regulate DeFi, and coders could pay the price

Protocol Fintech

Good morning, and welcome to Protocol Fintech. This Monday: the SEC makes a move on DeFi, SWIFT action, and Hester Peirce on regulating code.

Off the chain

Bank runs in Moscow. Armies funded by DAOs. Avocado inflation. This year’s off to a chaotic start. The jitters over cutting Russian banks off from SWIFT, which Western powers seemed to overcome this weekend, were roasted on Twitter as a sign of cowardice. But maybe it was just caution. Our modern financial system is threaded together delicately. No one quite knows what happens when we start pulling it apart, even if the exigencies of war require it.

— Owen Thomas (email | twitter)

The SEC’s big DeFi move

Gary Gensler has been talking about taking on the crypto industry since he started last April. Now he’s getting down to business. The SEC is taking on the crypto industry in a way that could have far-reaching implications, particularly for DeFi, by expanding the agency’s regulatory authority over decentralized trading systems. The potential mechanism is a rule quietly proposed in January that would expand the definition of an “exchange” to include “communication protocol systems.”

This could be the SEC’s big move on crypto. The industry is taking notice.

  • “It’s the biggest, most profound rule-making the SEC has ever had,” said Nicholas Losurdo, a partner at law firm Goodwin who previously worked at the SEC. “It has the ability to sweep in a lot of DeFi and crypto, whereas now they don’t have jurisdiction.”
  • The comment period on this proposal is still open, but some crypto industry officials are concerned enough that they’ve called on the SEC to extend its comment period to 90 days so that more industry participants can give comments.
  • The proposal could “expand SEC authority over spot digital asset markets and peer-to-peer decentralized networks in ways not publicly mentioned or discussed in the Proposal,” Michelle Bond, CEO of the Association for Digital Asset Markets, which represents Galaxy, FTX, Paxos and others, wrote to the SEC.

DeFi players should take note. This change in definition could mean regulating not just centralized crypto entities but even decentralized finance protocols, according to Losurdo.

  • To be clear, the 654-page proposal does not mention crypto or DeFi. But it makes key changes, such as changing the definition of an “exchange function” to bringing together people who interact, instead of just “orders” as it was before.
  • This broadening of the scope of what an exchange is could pull in a range of crypto products, Losurdo said, since the SEC document says that it applies to “trading any type of security.” And Gensler has been clear that he believes that many digital assets are in fact securities.
  • Any person or group working on a DeFi protocol — which could mean a wide range of contributors, since the projects are typically open source — might need to register with the SEC, Losurdo said. Even someone who wasn’t part of a company but wrote software would potentially need to register, he said.

It’s unclear how this would practically work. The SEC has enough trouble going after centralized crypto companies.

  • Many decentralized finance protocols aren’t owned by a company. They may be run by a DAO and operate on automated software, so it’s unclear how the SEC would regulate these entities.
  • It could go after the companies that create these protocols. The SEC has reportedly investigated Uniswap Labs, the company that created decentralized crypto exchange Uniswap. But it’s unclear how such action would change anything with the protocols themselves, which have a life of their own.
  • Many DeFi protocols are managed overseas, or have key individuals who are not U.S. citizens or residents, so that’s another challenge.

The SEC is already trying to get more of the crypto world under its purview. So far it’s a mixed bag.

  • It has gone aggressively after crypto lending, recently settling with BlockFi for $100 million. But that involved a centralized lending operation. It’s not clear how the SEC would pursue truly decentralized lending, or more complex operations like staking.
  • Gensler has said he believes crypto exchanges need more protections for investors, and thus should be regulated by the SEC. But to do that, the SEC would need to demonstrate that assets on exchanges are securities. And that may remain muddy until Congress acts.

It’s not clear what will happen with this particular rule change: Look at the SEC’s climate rule morass for how easy it is for rule-making to get bogged down in lobbying and technical detail. But getting a rule passed is one thing. Figuring out how to enforce it against DeFi will make that look easy.

— Tomio Geron (email | twitter)


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On the money

On Protocol: Europe’s holdout governments gave way on banning some — not all — Russian banks from SWIFT. The U.S. and its Western allies will also work to freeze the assets of Russia’s central bank, the White House, the European Commission and others jointly announced Saturday.

Betterment rolled out a student loan management product. The robo-investing software company said the new tool allows users to monitor and make additional payments to their student loans.

Also on Protocol: Ukraine changed its mind about accepting cryptocurrencies, announcing wallet addresses to take bitcoin, ether and other tokens on its official government Twitter account. Previously, a nongovernmental organization was the best way to funnel crypto assistance.

A federal grand jury indicted BitConnect founder Satish Kumbhani, the DOJ said Friday. Kumbhani was charged with defrauding investors of $2.4 billion through a crypto lending product that officials said “operated as a Ponzi scheme.” The exchange shut down in 2018 after receiving cease-and-desist orders from state regulators.

The European Parliament is delaying a vote on crypto regulation. A directive originally scheduled for a vote Monday drew criticism for language that could be taken as a “de facto bitcoin ban,” an official said.


Coinbase CEO Brian Armstrong is philosophical about the ups and downs of the market. “A few months ago there were people I saw lamenting, like, ‘I wish I bought crypto sooner or COIN stock sooner,’ and they didn't think they would ever get a chance to buy something at these prices again. Then by some stroke of luck, when that opportunity does arise, they feel pessimistic or something,” he said on the company’s earnings call last week.

SEC Commissioner Hester Peirce gave a broad-ranging interview to Barron’s that illuminated some of the principles behind the digital asset-friendly views that have led some to call her “Crypto Mom.” “You have to be careful not to regulate software code, because there are First Amendment considerations around trying to stop people from coding,” she said about regulating DeFi

Coming up

Tuesday’s a busy day for earnings, with SoFi (SOFI), Shift4 (FOUR) and Bottomline Technologies (EPAY) reporting. Look for SoFi’s update on its national bank charter and more signals on the state of ecommerce.

Also Tuesday: The Federal Reserve’sData and Connectivity Symposium. Kavita Jain, a deputy associate director who leads innovation policy at the Fed, is hosting the online event.

TheBank Automation Summit takes place Tuesday and Wednesday in Charlotte, North Carolina.

Payoneer (PAYO) reports earnings Thursday, and Cipher Mining (CIFR), a U.S. bitcoin miner, reports earnings Friday.

The Federal Reserve Bank of San Francisco hosts the Fintech: Innovation, Inclusion and Risks Conference Friday and Saturday. Figure co-founder June Ou will deliver the opening keynote.


The future of the digital economy is in our hands. That’s why NovoPayment partners with fintechs to turn their visions into reality. NovoPayment’s API-based platform delivers digital banking, payment, and card solutions that adapt, scale, and evolve alongside your company. Our modular approach empowers you to innovate your way.

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