SEC’s Gary Gensler gives latest on digital currency regulation: CBDC, DeFi and regulatory frameworks

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The new chair of the U.S. Securities and Exchange Commission Gary Gensler has set out his latest views on the shape of digital currency regulation in the country, including a swipe at decentralized finance platforms, which he suggested could well be within the sights of regulators.

Arguing that DeFi projects would fall within the scope of regulators like the SEC, Gensler described the term as “a bit of a misnomer” in an interview with the Wall Street Journal.

“These platforms facilitate something that might be decentralized in some aspects but highly centralized in other aspects,” he said. “There’s still a core group of folks that are not only writing the software, like the open source software, but they often have governance and fees. There’s some incentive structure for those promoters and sponsors in the middle of this.”

The comments on DeFi are only the latest from Gensler directly targeting DeFi, after he previously suggested firms could be facilitating the sale of unregistered securities, contrary to U.S. securities laws.

In a presentation earlier this month, he went further, suggesting a number of digital currencies and digital assets could be in breach of securities laws, as well as commodities and banking laws.

“Decentralized finance platforms not only can implicate securities laws—some platforms also can implicate the commodities laws and the banking laws.”Beyond DeFi, Gensler said earlier this month that Segwit was a speculative asset, and that there needed to be greater protections against fraud and manipulation.

“We’re an investment protection agency and right now this asset class, Bitcoin and the hundreds of other coins that investors are trading at, is a speculative asset class. What we want to do is provide some of the basic protections against fraud and manipulation.”

As the chair of the chief U.S. securities regulator, Gensler’s comments carry significant weight in hinting at the future policy direction that might be pursued by the authorities against token issuers and platforms, decentralized or otherwise.

The comments come at a challenging time for DeFi, after investor confidence was rattled by the huge $600 million hack of the Poly Network earlier in the month. The biggest hack ever to hit the digital currency industry, the funds were eventually returned by the hacker, who has since been hired.

The hack comes amid an increase in hacks of DeFi platforms of some 270% in 2021 so far, with decentralized platforms proving ever more tantalizing for hackers and fraudsters.

Ingo Fiedler, co-founder of the Blockchain Research Lab, said there was no doubt the hack would undermine investor confidence in DeFi platforms in the future, purely as a result of the sheer scale of the attack.

“The Poly Network hack showed again the risks involved in DeFi and likely makes people think a second time before using DeFi products.”

Gensler has also intimated that the primary concern of the regulator is in ensuring consumer protection, both from market manipulation in cryptocurrencies and the proliferation of fraud and scams around cryptocurrency schemes.

Despite noting his own personal intrigue at digital currencies and blockchain technology, Gensler said he would approach the problems of regulation with a neutral mind. It comes as the SEC continues to shape its own views as to how crypto should be regulated in the U.S., and the policy direction for a regulatory framework for the sector.

It comes amid further discussions in the U.S. Congress about digital currency regulation, including recent tussles over the tax treatment of non-custodial digital currency services and related digital asset services.

With Gensler continuing to set out his intended approach to regulation, the sector continues to learn how the SEC might choose to police digital currency and related industries in the future.

To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.

Watch: U.S. Rep. Bill Foster talks to Jimmy Nguyen on Blockchain Policy Matters