Gary Gensler sounds alarm on growing DeFi activity, says SEC looking to regulate crypto sector

US Securities and Exchange Commission chairman Gary Gensler reiterated his position on the burgeoning decentralized finance (DeFi) sector yesterday, calling for an increased overview of the space while signaling regulations were necessarily required.

“While I’m neutral on the technology, even intrigued—I spent three years teaching it, leaning into it—I’m not neutral about investor protection,” said Gensler, who is scheduled to give a speech on crypto today at the Aspen Security Forum. 

He added, “If somebody wants to speculate, that’s their choice, but we have a role as a nation to protect those investors against fraud.”

Crypto regulation is coming

Gensler—who was elected as SEC chairman earlier this year and is regarded as a ‘crypto-friendly’ official in media circles—said he had pushed officials to look at a whole variety of crypto-related legislation in recent times.

 “I’ve asked the staff to use all of our authorities anywhere we can,” he said, confirming the SEC is working on seven crypto policies: Initial coin offerings, trading venues, lending platforms, decentralized finance, stable value coins, custody, and ETFs and other coin funds.

The SEC official added regulating crypto exchanges is an easy way for the government to get a quick handle on crypto trading. It’s seemingly working: While the US is home to some of the most regulated crypto exchanges on the planet, futures powerhouses like Binance, Bybit, and OKEx have faced the regulatory music in different countries amid a broader crackdown on crypto investments.

SEC Chair Gary Gensler wants to put regulatory “speed limits and traffic lights” in place to protect crypto users & help the industry grow, @benbain & Robert Schmidt report

SEC has 7 crypto initiatives underway, including DeFi, ETFs & lending, he says. https://t.co/RTqxYFxXN7

— Lydia Beyoud (@ElleBeyoud) August 3, 2021

DeFi markets a ‘challenge’ for new investors

Gensler turned his focus to the growing DeFi sector for a large segment in the interview. Such protocols dump middlemen-controlled systems for financial services run on and governed by smart contracts, with use cases and tools ranging from peer-to-peer lending, to self-paying loans, to personal banking.

But that’s where Gensler says lays the trouble: “If firms are advertising a specific interest-rate return on a crypto asset, it could bring the loans under SEC oversight,” the SEC chair stated. Platforms that pool digital assets could be seen as akin to mutual funds, potentially allowing the SEC to regulate them, he added.

Think Gensler is offering a fair warning here for DeFi players, claiming those who publicize their APY will be considered lenders according to the SEC & under their purview

— Ma/ya Zehavi (@mayazi) August 3, 2021

Some risks to new investors, he pointed out, include the notorious volatility of cryptocurrencies and the presence of novel products in the market. These present a challenge to security regulatory and financial overseers, he added.

“Crypto lending platforms and so-called decentralized finance (‘DeFi’) platforms raise a number of challenges for investors and the SEC staff trying to protect them,” he noted. Meanwhile, while no such laws have been released, the crypto market seems to have already reacted.

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