DeFi regulation faces a clash between crypto advocates and Wall Street over an “innovation exemption” for tokenized assets. The DeFi Education Fund argued to the SEC that decentralized protocols should not be regulated like centralized exchanges. Meanwhile, the Securities Industry and Financial Markets Association pushed for regulating Automated Market Makers based on their function, citing investor protection risks.
DeFi regulation is back in focus as the crypto industry and Wall Street disagree on a proposed ‘innovation exemption’ for tokenized assets. The DeFi Education Fund (DEF) wrote to the SEC arguing decentralized protocols should not be ‘misclassified as intermediaries’ like traditional exchanges.
Legal officer Ayan Dow stated, “DeFi tools that provide liquidity or run autonomously aren’t performing exchange functions, and neither the tech nor its devs should be regulated as exchanges.” According to the advocacy group, non-custodial applications do not fit the legal definition of an exchange.
The group warned that classifying developers as intermediaries would place an overwhelming regulatory burden on them. It pressed for any DeFi regulation to exclude disintermediated software, Automated Market Makers, smart contracts, and non-controlling developers.
The DEF letter was a direct response to the Securities Industry and Financial Markets Association (SIFMA). That TradFi group argued the SEC should regulate AMMs based on their function in supporting tokenized securities trading, not their decentralization.
SIFMA believes the Commission should maintain technology neutrality by regulating AMMs “based on their market function rather than protocol architecture.” This stance echoed earlier calls from Citadel Securities for strict regulation of DeFi platforms handling tokenized securities.
Wall Street’s opposition stems from concerns over scams and blowouts in the DeFi sector, advocating compliance for all handling tokenized securities. However, DEF views this opposition as motivated by DeFi’s potential to disrupt traditional intermediary business models. It remains to be seen how the SEC will address these competing interests in its upcoming regulatory framework.
