The DeFi sector is doubling down on its opposition to the Citadel-led call to ban decentralized protocols from blanket regulatory exemptions.
In one letter Speaking to the US SEC on Monday, the Blockchain Association (BA) called Citadel’s proposed regulation of DeFi protocols that handle tokenized assets a “wrong approach.”
The BA is an advocacy organization and umbrella group with key industry members, including Coinbase. In the letter, the BA countered:
Securities laws regulate intermediaries. They do not automatically turn the neutral infrastructure into an exchange, broker or dealer simply because that infrastructure is part of a tokenized market.
The lobby group added that the DeFi sector is not looking for a “free pass.” However, it asked the SEC to consider how the underlying technology works before regulating a DeFi protocol.
The digital asset industry isn’t asking for a free pass. Tokenized securities are still securities. The question is whether the SEC will apply the law in a way that reflects how modern infrastructure actually works.
Tokenized securities are an on-chain version of traditional securities, but traded on blockchain rails.
Citadel wants everyone to follow the rules
Intriguingly, the BA’s request for the SEC to consider how “modern blockchain infrastructure design” works, which Citadel and SIFMA (broader TradFi group) oppose. For TradFi players, the SEC must ensure a level playing field through a “neutral technology” framework.
For them, the question is not whether a DeFi location is supervised (under the control of the developer) or not. What is crucial, they added, is that any platform handling tokenized securities must be supervised, just like traditional intermediaries.
According to critics of the proposed innovation exemption, investor protection in the DeFi world, which is rife with scams and ‘back-pull’, can only be ensured through regulation.
Last week, another crypto lobby, the DeFi Education Fund (DEF), denounced SIFMA and Citadel’s call for regulation of AMMs (automated market makers), which experts consider decentralized platforms.
It remains to be seen which route the SEC will take and whether the disgruntled party will sue the agency for its decision on the innovation exemption.
Even if the agency’s regulations or guidelines regarding DeFi exemptions are not codified through the CLARITY Act, they can still be challenged in court. For example, Roman Storm, the developer behind Tornado Cash who has no control over the crypto mixer, is still active faced with a new trial.
Final summary
- Blockchain Association has joined the DeFi Education Fund to fend off Citadel and Wall Street’s push for regulation of decentralized protocols.
- The DeFi lobby groups implored the SEC to consider the neutral nature of decentralized protocols before attempting to regulate them.