Regulatory Update: Recent Developments Impacting DeFi
Level 0 - Junior Compliance Narc
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Today’s post is a rare Level 0 Junior Compliance Narc post.
That means it’s time to gather around for a regulatory update.
There have been quite a few headlines about regulations and hundreds of pages published across various discussion topics. We’ve reviewed all the info and pulled out the key takeaways.
Coverage includes:
Crypto crackdown prediction
Gary Gensler Gets Grilled
DeFi Illicit Finance Risk Assessment
Stablecoin Bill (briefly)
While regulations may not be the most exciting topic, they’re a crucial aspect of the industry today. In crypto’s weak state, regulators have taken it upon themselves to go after companies that are financially crippled and less likely to put up a fight. At minimum, companies are going to be dragged kicking and screaming into compliance. Let’s get into the nitty gritty.
Ex-SEC Chief Predicts Crypto Crackdown
John Reed Start, former Chief of the SEC’s Office of Internet Enforcement has characterized a recent cluster of SEC actions as a “crypto exchange crackdown.” He predicts that exchanges will need to stop doing business in the US (in their current form).
Right out of the gates in 2023, a series of actions have been taken against crypto companies. What follows are some of the most recent ones.
The SEC charged the Beaxy exchange and its executives with failing to register as an exchange, the founder with raising $8M in an unregistered offering, and alleged misappropriation of investor funds for personal use.
The SEC also charged liquidity providers on Beaxy as operating as unregistered dealers. Crypto exchanges can’t work without liquidity, and we may now see some of the larger professional market making firms (US headquartered companies) withdraw from operating on unregulated exchanges. This forces exchanges to come into compliance indirectly.
Bittrex has received a Wells Notice for failing to register as an exchange.
Coinbase has received a Wells Notice for violation of securities laws (staking services, wallet services, and listing certain tokens). Coinbase’s CEO has started that the company is preparing to go to court with the SEC. The SEC’s action may seek injunctive relief, disgorgement, and civil penalties.
Proposed Amendments to Exchange Act Rule 3b-16: On April 14 the SEC re-opened the comment period for the proposed rule changes which reiterate the applicability of rules governing securities exchanges (or Alternative Trading Systems) to DeFi protocols. SEC Chairman Gensler commented:
“I believe this supplemental release will help address comments on the proposal from various market participants, particularly those in the crypto markets…many crypto trading platforms already come under the current definition of an exchange and thus have an existing duty to comply with the securities laws.
There are people (short sellers) celebrating “Coinbase’s downfall” and parading the end of crypto based on these events. It’s not as simple as it seems.