In an opinion piece, the US Securities and Exchange Commission (SEC) Commissioner Caroline Crenshaw outlines the benefits of embracing decentralized finance (or DeFi). But she also warned of the dangers of a lack of protective regulatory framework.
In the article, which appears in the inaugural issue of “The International Journal of Blockchain Law”, Crenshaw calls for more transparency in the cryptocurrency community as it seeks to comply with the SEC’s rules.
“In the brave new [decentralized finance] world, to date, there has not been broad adoption of regulatory frameworks that deliver important protections in other markets”
Retail investors are at a disadvantage to professional investors
Besides a lack of transparency, the commissioner says decentralized finance fails to protect its consumers. And yet, by offering protection, DeFi …” contributes to a two-tier market in which professional Bitcoin investors and insiders reap outsized returns”.
While most DeFi projects are open-source and record transactions on-chain, Crenshaw argues that retail investors are getting a raw deal from professional investors — as the latter has the necessary resources to audit code and development teams.
According to the Commissioner, it’s only fair to build a financial system that calls for potential investors to interpret complex and sophisticated code with ease.
Difficult to track and mitigate manipulation in the DeFi community
The Commissioner also highlighted major concerns about the decentralized finance community wanting to seek anonymity through the use of pseudo accounts — and the fostering of market manipulation.
According to Crenshaw, it’s difficult to track and mitigate manipulation through the use of technology and collusive trading — especially when the decentralized finance market participants operate anonymously behind pseudo accounts.
And due to market manipulation, investors are more likely to incur heavy losses. Thanks to normal signals such as trading volumes and momentum becoming unreliable.
In the same breath, the Commissioner believes that decentralized finance projects should openly communicate with the SEC to solve the dilemma of resolving anonymity and help the DeFi community to comply with the commission’s existing rules.
Over the years, the decentralized finance community has embraced anonymity as a feature rather than a heavy burden on its participants. But Crenshaw doesn’t believe investors prioritize anonymity over making a handful of sales.
“In moving to [decentralized finance]. I suspect more retail investors are not doing so because they seek greater privacy. They’re [however] seeking better returns than they believe they can find from other investments.”
At SEC Speaks Conference in October, the Commissioner suggested coming up with existing regulatory frameworks for decentralized finance — as a way to provide consumer protections in the digital market space.
