DeFi Offers Opportunities But Needs Better Compliance, Says SEC Commissioner

The Simplification of DeFi Products Will Cement It as the Future of Finance

DeFi Offers Opportunities, but needs better compliance, says SEC Commissioner

SEC Commissioner Caroline Crenshaw believes DeFi has potential, but needs to address transparency and pseudonymity.

In a recent article for the inaugural issue of “The International Journal of Blockchain Law,” Crenshaw laid out her perspective about decentralized finance (DeFi). While “DeFi presents a panoply of opportunities,” she also said it poses important risks. 

In presenting a background of the regulatory landscape surrounding DeFi and the SEC’s role in that, she highlighted two important issues that the community should address. Although intrinsically related, she singled out a lack of transparency and pseudonymity.

DeFi lacks transparency

When addressing the first issues, Crenshaw highlighted the role of the SEC. Given that the regulator is responsible for enabling access to critical information, so investors can make informed investment decisions, she said DeFi needs to address transparency. 

While acknowledging that the code is open source and transactions are recorded on a public blockchain, Crenshaw referred to a different kind of transparency. She related how much of DeFi is funded by venture capitalists, whose contributions enable them preferential access to project arrangements. More ample resources also allow professional investors to audit projects before committing to them. “Retail investors are already operating at a significant disadvantage to professional investors in DeFi, and this information imbalance exacerbates the problem,” she says. 

Pseudonymity synonymous with DeFi

Crenshaw also noted that it was the SEC’s responsibility to prevent market manipulation. In this regard, she said that DeFi’s proclivity for pseudonymity makes markets more vulnerable to manipulation.

“Without an efficient method for determining the actual identity of traders, or owners of smart contracts, it is very difficult to know if asset prices and trading volumes reflect organic interest or are the product of manipulative trading by, for example, one person using bots to operate multiple wallets, or a group of people trading collusively,” she explains. 

While admitting that pseudonymity was synonymous with DeFi, she said that retail investors have been attracted in droves not by this feature but by the belief that they can find better returns than other investments.

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