If It Quacks Like A Duck… SEC Chairman Gary Gensler Invokes The “Spirit Of The Law” As DeFi Takes Center Stage – Finance and Banking

SEC Chairman Gary Gensler vowed on November 4, 2021, that the SEC will
look beyond the label of decentralized finance (DeFi) or
peer-to-peer lending products and consider the “economic
realities” of a given product or arrangement. 

Chairman Gensler further warned that “[h]istory tells us
that when a group of people try to mask the underlying economic
realities of a certain product or instrument, investors can get
hurt. Further, their pain can spread from the financial system to
the real economy.” 

Chairman Gensler’s remarks come as DeFi has come under
intensifying regulatory scrutiny in recent months, adding to the
growing library of warning signals and soundbites from regulators
and legislators.

In August, the SEC charged two Florida men and their Cayman
Islands company (d/b/a Blockchain Credit Partners) for the
unregistered sales of securities using smart contracts and
“so-called” DeFi technology in what the agency described
as the agency’s “first involving securities using DeFi
technology.”

In September, it was reported the SEC was investigating a prominent
DeFi platform as enforcement attorneys reportedly sought
information about how the platform was used and marketed.

In October, the Financial Action Task Force (FATF), an
independent inter-governmental body that develops and promotes
policies to protect the global financial systems from money
laundering, issued a report warning that material influencers or
controllers of DeFi application should be subject to anti-money
laundering (AML) and controlling the financing of terrorisms (CFT)
obligations.

In November, the President’s Working Group (PWG) published a
report on stablecoins, which echoed similar
concerns, noting that “despite claims of decentralization,
operations and activities within DeFi are highly concentrated in
and, governed or administered by, a small group of developers
and/or investors. Despite some asserted distinctions from more
traditional or centralized financial products, services, and
activities, DeFi arrangements … raise similar investor and
consumer protection, market integrity, and policy
concerns.”

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.