It's morning at the SEC for defi innovation

The new Chair of the US Securities and Exchange Commission (SEC) has given one of the new administration's most promising statements on crypto policy to date, putting a firm end to the era of regulation-by-enforcement which has plagued the US (and other countries) and making clear it is now to be replaced with rule-making to support innovation.

In his remarks, the Chair embraced DeFi as consistent with American values:

The American values of economic liberty, private property rights, and innovation are in the DNA of the DeFi, or Decentralized Finance, movement.

He also encouraged a pro-innovation approach that accommodates peer to peer technologies:

I do not believe that we should allow century-old regulatory frameworks to stifle innovation with technologies that could upend and most importantly improve and advance our current, traditional intermediated model.  We should not automatically fear the future.

And that:

Most current securities rules and regulations are premised upon the regulation of issuers and intermediaries. The drafters of these rules and regulations likely did not contemplate that self-executing software code might displace such issuers and intermediaries.

Chair Atkins also acknowledged a clear distinction between software development activity and intermediated financial services:

Engineers should not be subject to the federal securities laws solely for publishing this type of software code.

Chair Aktins has asked SEC staff to explore how further guidance or rulemaking may be helpful to enable people to transact with DeFi in compliance with existing law and he specifically highlighted the benefits of eliminating cost, increasing capital efficiency and enabling new kinds of financial products with greater liquidity.

While the Commission and its staff work to propose fit-for-purpose rules of the road for on-chain financial markets, I have directed the staff to consider a conditional exemptive relief framework or “innovation exemption” that would expeditiously allow registrants and non-registrants to bring on-chain products and services to market.

The SEC's proactive approach by way of rulemaking and guidance stands in sharp contrast to many jurisdictions which have discussed introducing friction to tackle scams, and where the regulatory perimeter is being 'tested' by regulators at great cost which might be better put to use funding fit for purpose regulation and rules. It is also a sharp departure from the SEC under Chair Gensler, as one leading US attorney put it:

The SEC [was] simply seeking to ban DeFi protocols in America

With a markets infrastructure bill before Congress and stablecoin legislation likely to pass, together with tax amendments expected shortly the US is rapidly moving to embrace crypto and blockchain technology in a way that other countries will be watching closely, as the size of the US market can dictate standards in financial services and products like few others can. By Michael Bacina with Steven Pettigrove