Karsten Wenzlaff, Advisor
August 26th, 2025
Karsten Wenzlaff is a Crowdfunding and Fintech Expert from Germany. He is Secretary-General of Digit[...]
SEC Considers DeFi With Innovation Safe Harbour
Crypto Policy | June 11, 2025
Image: June 9, 2025 DeFi Crypto Roundtable (Coindesk via youtube)
Atkins and Peirce Back Safe Harbour and Rule Updates to Grow DeFi Responsibly
On June 9, the U.S. Securities and Exchange Commission (SEC) hosted another crypto task force roundtable series session called, "DeFi and the American Spirit", bringing together together regulators, legal experts, DeFi protocol developers, and investors to discuss how to the potential of regulating decentralized financial systems in ways that protects users without stifling innovation.
See: Bitcoin’s Evolving: The Rise of DeFi on Bitcoin
From the get-go, Chair Paul Atkins set the tone by opening the event by clearly stating that publishing code should not be treated as a crime:
“We will not regulate the act of writing open-source software. We do not prosecute the author of a hammer manual when someone misuses a hammer.”
The rest of the session built on this idea and focused on how the SEC can provide safe ways for DeFi projects to operate legally while still addressing investor risks.
Key Takeaways
1. SEC is Evaluating a New Pathway for DeFi Innovation and Compliance
In his remarks, Chair Atkins introduced the idea of a “conditional exemptive relief framework” which would allow DeFi innovators to build and launch on-chain products under limited conditions without triggering enforcement right away. This type of framework is similar to a regulatory sandbox that provides time-bound relief as long as participants meet specific safeguards.
“We are exploring a conditional exemptive relief framework that would allow experimentation under defined boundaries, similar to an innovation safe harbor.”
See: SEC Clears Crypto Staking. What It Means for Canada
Commissioner Hester Peirce (aka Crypto mom) echoed this sentiment saying without a structured pathways to compliance, many innovators will either operate in legal uncertainty or offshore their projects out of the United States.
“Without a clear, conditional pathway, we are telling innovators you are on your own. That is not a message we want to send if we value the benefits of decentralized systems.”
2. SEC to Modernize Existing Rules for On-Chain Finance
In addition to the DeFi safe harbour, Chair Atkins also called upon his staff to modernize the current SEC rules to accommodate traditional issuers and intermediaries who want to use on-chain infrastructure.
See: Crypto.com Canada Gains Canadian Regulatory Approval
This move shows that the SEC is looking to facilitate both new DeFi entrants and existing market players who are building tokenized products or using smart contracts to manage trading, issuance, or custody.
“I have asked the staff to consider whether amendments to the Commission’s rules and regulations would be better suited to provide needed accommodation for issuers and intermediaries who seek to administer on-chain financial systems.”
3. Acknowledging efficiency, liquidity, and new financial instruments
Atkins also discussed that on-chain systems can bring real benefits to the market, such as lower transaction costs, faster settlement, broader access, and the ability to create entirely new asset classes.
“I also am excited about the use of on-chain software systems by issuers and intermediaries to eliminate economic frictions, increase capital efficiency, enable new types of financial products, and enhance liquidity.”
See: New AI Minister Prioritizes Growth Over Rules
It's clear support and endorsement of blockchain as a tool for economic growth, not just a solution for compliance challenges.
4. Off-chain risks are growing and need better disclosure
Several panelists, including Rebecca Rettig of Polygon Labs, warned that some of the most serious risks in DeFi happen off-chain. These include hidden liquidity deals, token allocations to insiders, or governance control partnerships.
“It is not always what is on-chain that creates the risk. It is often what is not disclosed, like side agreements, control over governance tokens, or preferential liquidity deals.”
Panelists argued that DeFi projects need better disclosure on how protocols are governed, how tokens are distributed, and whether any third parties receive special treatment or not.
5. Rules should follow activity, not labels
Legal and industry experts said regulators should stop focusing on whether a token is a security and start regulating based on what the product or service actually does.
See: UK Publishes Draft Rules for Crypto Regulation
Angela Angelovska-Wilson of DLx Law said:
“We waste enormous energy litigating over whether X token is a security. The better path is regulating the activity, such as staking, custody, or lending, regardless of the label.”
Michael Jordan of the Digital Dollar Foundation agreed, saying:
“If we regulate the technology, someone will build around it. If we regulate the activity, we have a chance at real consumer protection.”
Important to understand the growing consensus that rules should distinguish between different types of financial behaviour even when the technology is similar.
6. Not all interfaces are equal under the law
Josh Garcia of Ketsal pointed out that some interfaces like custodial front ends that take custody of user funds or routes trades on behalf of users may require stricter oversight whereas protocols without admin control may require lighter regulation. Advocating for a layered regulatory approach that differentiates on function and control.
See: Takeaways from the SEC’s Crypto Custody Roundtable
“A protocol with no privileged admin keys is not the same as a custodial front end that routes retail funds. The obligations differ, and so should the rules.”
Outlook
After several Crypto Task force roundtable sessions, the SEC and participants are finally getting on the same page while focusing on conditional exemptions, regulatory modernization, and functional oversight. All together, it's a series effort to balance investor protection with lawful DeFi innovation. For fintech founders and digital asset platforms in Canada and globally, it's an important benchmark. If the U.S. begins providing clear compliance pathways and policy support for tokenized systems, then other jurisdictions will need to keep up or risk flight of builders and capital.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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