U.S. SEC Chairman: Regardless of how decentralized DeFi platforms are, they may still fall within regulatory scope.

In an exclusive interview with The Wall Street Journal, U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler reiterated his stance on regulating DeFi. He believes that regardless of how "decentralized" DeFi platforms claim to be, they may still fall within the regulatory scope.

"Decentralization" Cannot Escape Regulation

The Wall Street Journal states that the general argument is that DeFi developers write software to automate trading, developers themselves cannot control the software, there is no centralized entity in control, and therefore the decentralized world does not need to be regulated by the SEC. In other words, sufficiently decentralized cryptocurrencies like Bitcoin and Ethereum do not require regulation.

However, Gensler stated that if some projects use valuable digital currencies or similar incentives to reward participants, then they may cross the line, regardless of how decentralized they are.

In a speech in early August, Gensler also mentioned that DeFi platforms for trading and lending not only involve securities laws but also commodity laws and banking laws. Many platforms claim to prohibit U.S. investors from visiting, but many people still trade through VPNs. The American public is buying, selling, and borrowing on these DeFi platforms, with no investor protection. Gensler stated that as long as these platforms offer securities, they fall under the jurisdiction of the SEC.

Recently, the SEC sued a DeFi lending platform and determined that its synthetic tokens and governance tokens are securities.

First DeFi Regulation Case in August

Previously reported that the SEC took enforcement actions against DeFi lending protocols DeFi Money Market DMM and Blockchain Credit Partners in early August.

DMM issues mTokens and governance token DMG. Users can use DeFi protocols to synthesize currencies like DAI, BTC, USDT into corresponding tokens like mDAI, mBTC, mUSDT, and earn 6.25% interest.

The governance token DMG provides governance rights, profit sharing, and can also profit from trading on the secondary market. The SEC accused them of fraudulently issuing $30 million worth of unregistered securities in governance tokens and providing over 6% interest through smart contracts.

Similarities Between DeFi and P2P Lending Platforms

Gensler pointed out that the term "DeFi" is misleading, as these platforms may be decentralized in some aspects but highly centralized in others.

Regarding how to regulate DeFi, Gensler mentioned a case of other P2P lending platforms 15 years ago, stating:

Prosper Marketplace, Lending Club, and other lenders arranged for investors to collaborate with banks and companies to provide loans to consumers, including interest in the notes sold to investors, who would receive interest when the borrowers repay. The company initially did not register with the SEC, and the SEC in 2008 classified it as securities.

Prosper, Lending Club were founded in 2006, 2007, and agreed to register their loans in 2008, including providing credit ratings of borrowers to investors.