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Lawyer Says SEC’s New Crypto Cops Are Coming for DeFi

Roll Call | Peter Feltman | Jun 14, 2022

SEC enforcement  - Lawyer Says SEC’s New Crypto Cops Are Coming for DeFiThe Securities and Exchange Commission’s decision to beef up its cryptocurrency enforcement staff could signal new worries for digital asset exchanges and others in the industry, as the agency broadens its view of whether some cryptocurrencies are securities.  The SEC has plenty of potential targets, including non-fungible tokens, stablecoins and platforms that might come under the agency's authority if they trade digital tokens that are securities

  • It will add 20 enforcement positions dedicated to crypto, boosting the total enforcement staff focused on digital assets to 50
  • Those tracking the development say the agency will delve deep, looking for violations among a crop of startup ventures.

See:  DeFi Advocates Call out the SEC (Again) over attempts to define ‘Exchange’

Ian McGinley, a partner at Akin Gump Strauss Hauer & Feld LLP, said he expects special scrutiny on one of the newest areas of digital assets: decentralized finance platforms, called DeFi for short. These ventures often use the decentralized structure to establish peer-to-peer markets, in which users engage in financial transactions with other parties directly, without an intermediary such as a stock exchange or bank.

  • He pointed out that SEC Chairman Gary Gensler has already said the agency is examining them. A small number of DeFis handle much of the total activity in the sector. According to Gensler, the top five DeFi platforms account for about 80 percent of the total trading on all platforms.
  • If in fact the decentralized platform is controlled by a small group, I think you are likely to see some actions.
  • If an exchange is purely decentralized, then it is very hard for the SEC to make the case that the exchange is selling securities.
  • Expects the SEC to pursue cases against non-fungible tokens, which some consider to be the strangest new development in digital assets.
    • With NFTs, an investor or customer buys a marker on a distributed ledger that is attached to artwork or music. The owners of NFTs don't always own the original items, just the digital marker.
    • The NFT structure can be used in other ways, however, such as to represent shares of a company or to serve as currency in video games.

See:  SEC Considering 50 Rule Changes: “One of the largest regulatory agendas in years”

“It's highly likely we will see some SEC enforcement in NFTs, especially since we’ve seen some state regulators recently take action against some NFT projects for selling unregistered securities,” McGinley said.

SEC Commissioner Hester Peirce has said that fractional NFTs, which represent shared ownership, might be securities, though she said additional guidance from the agency would be helpful.

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