SEC delves into DeFi
Updated: Sep 9, 2021
With the reported DeFi market capitalisation of $133 billion and rising, it is unsurprising the SEC has announced moves to try and regulate the industry. Anchain AI, a blockchain analytics company, has signed a $125,000 one year deal with the SEC to monitor and report on DeFi. The agreement has an option for a further 4 years of extensions.
The SEC has been grappling with DeFi since charging Ether Delta founder, Zachary Colburn, with operating an unregistered exchange in 2018. In that case, Colburn was prosecuted, despite the platform itself being decentralised, as the website for the platform was centralised and run by Colburn. In effect, this gave the SEC a 'face' of Ether Delta which could be prosecuted. That matter was resolved on a 'no admission basis' as a settlement but has been held up as an indication of the SEC's view of decentralised software.
The SEC seems to be following a similar approach, suggesting that DeFi, regardless of a decentralised structure, must be regulated in some way. This sentiment was shared with CFTC commissioner Dan Berkovitz who suggested that "unlicensed decentralised finance markets may be illegal".
SEC Chairman, Gary Gensler, recently stated that:
There’s still a core group of folks that are not only writing the software, like the open source software, but they often have governance and fees...There’s some incentive structure for those promoters and sponsors in the middle of this.
Gensler's statement indicates that while he recognises a platform may be decentralised, there is still identifiable people who are incentivised to play their role in DeFi projects. This suggests that where there are such identifiable people it is perhaps those who will be the subject of regulatory enforcement.
Notably, instead of just reactive monitoring, Anchain.AI has developed a product that serves as a "predictive engine" by collating and surveillance wallets tied to illicit actors, which will further assist in tracking any illicit uses of digital currency (which is of course highly traceable).
Whether this can be used from the SEC from an enforcement perspective is a different matter. However, the timing of the collaboration is interesting given the US announcement of the 'Crypto Bill' which, amongst other things, sought to address longstanding privacy concerns surrounding DeFi.