SEC commissioner at DeFi: follow the law or face enforcement – tech

In a recent article, SEC Commissioner Caroline A. Crenshaw urged participants in decentralized finance (DeFi) to voluntarily comply with securities law regulations, especially those governing risk disclosure. , warning that further coercive action is likely against those who do not.1


The reach of decentralized finance (DeFi) and related technologies has grown rapidly in recent years. Broadly speaking, DeFi seeks to deliver financial services through self-executing “smart” contracts and decentralized transaction records – “blockchains” – that reduce the need for traditional financial intermediaries.

Initially popularized by the digital currency Bitcoin, blockchain technology and the DeFi applications it enables have proliferated. From secured loans to interest-bearing deposits and fractional ownership of assets through non-fungible tokens, financial services companies, new and old, are developing new financial products and innovating existing ones while capitalizing on this trend. increasing decentralization.

The expansion and evolution of DeFi has been so rapid that regulators have until recently largely caught up. In 2017, the SEC released its investigative report on “DAO”, concluding that financial instruments can still be “investment contracts” regulated by US securities laws, even when issued by autonomous organizations decentralized (DAO) or governed by autonomous authorities. execute smart contracts.

In subsequent statements, the SEC has made it clear that the old securities rules can and will be applied to blockchain-enabled financial products that share the same investment objectives as traditional financial instruments.

Enter Commissioner Crenshaw

The article by Commissioner Crenshaw in the inaugural issue of The international journal of blockchain law continues the SEC’s message regarding the applicability of existing securities laws to DeFi and the very real potential for enforcement action against DeFi participants who do not comply with the law.

In particular, Crenshaw stressed the need to provide clear and specific disclosure of DeFi investment risks. While the lack of any disclosure is clearly problematic, the Commissioner went further by suggesting that general and broadly worded disclosure may also be insufficient:

[I]information asymmetries are likely to benefit wealthy investors and insiders to the detriment of smaller investors and those with less access to information. As a result, the current “buy in” approach of DeFi participants is not an adequate basis on which to build redesigned financial markets.

Acknowledging the lingering uncertainty surrounding DeFi regulation, Crenshaw also encouraged promoters to seek advice from the SEC when in doubt. For those who nevertheless market, enforcement action may result.

But Crenshaw notes that the application is not the preferred approach, adding that “[t]’The more projects that voluntarily comply with regulations, the less the SEC will have to investigate and litigate. “

Notably, the Crenshaw article closely follows the SEC’s first action against a DeFi market participant. Last August, the SEC instituted a cease and desist against two people and their Cayman Islands company for allegedly selling over $ 30 million worth of securities without registering with the SEC or complying with a registration exemption.

Available exemptions include private placements to investors accredited under Regulation D of the Securities Act and foreign offerings to foreign investors under Regulation S. The respondents in the SEC action did not fall within these exemptions or any other exemption and were therefore ordered to pay restitution and civil penalties. totaling over $ 13 million.

Key points to remember

  • DeFi products can be securities. In its previous reports and statements and more recently in Commissioner Crenshaw’s article, the SEC and individual auditors have made it clear that DeFi products and services are viewed through the lens of existing securities laws. Those who pass the decades-old test for identifying investment contracts (the
    Howey Test) are particularly susceptible to regulation.
  • Future participants should proceed with caution. The message from the SEC has been consistent and clear: for DeFi products that are securities, registration with the SEC is required unless an exemption is available, as in private placements to accredited investors under the SEC. Regulation D and foreign offerings to foreign investors under Regulation S. Experienced legal counsel should be consulted prior to proceeding with marketing to ensure that any potential offer is properly registered or exempt from registration.
  • Voluntary compliance will be viewed favorably.When in doubt, DeFi market participants should err on the side of voluntary compliance, including providing clear and specific disclosure of the risks associated with their products. While disclosure alone does not guarantee full compliance with applicable regulations, transparency is a fundamental tenet of U.S. securities laws, and Commissioner Crenshaw’s writings make it clear that such measures may reduce the likelihood of a breach. coercive action.
  • Penalties for violations can be substantial. Promoters of unregistered titles are exposed to substantial civil and criminal liability. The indirect consequences of an enforcement measure are also important. Violators will find it difficult to establish banking relationships, obtain regulatory licenses and raise conventional capital.
  • Corrective actions may be recommended. Those who have already started marketing DeFi products should determine if they have ever broken securities laws and, if they have, take corrective action. Likewise, trading platforms, intermediaries and other service providers who have already managed DeFi products should consider whether they also have disclosure or registration obligations.
  • Other securities laws may apply. Commissioner Crenshaw’s article does not directly state whether DeFi market participants are “investment firms” for the purposes of the Investment Company Act of 1940 or “investment advisers” for the purposes of the Investment Advisers Act of 1940. 1940; both laws generally require these entities to register with the SEC. Given the broad definition of “securities” under these laws, however, members of the DeFi community should carefully consider the applicability of these laws to their business.

Related links

Crenshaw, Caroline A., “DeFi Risks, Regulations and Opportunities” The international journal of blockchain law, Flight. November 1, 2021, available at

Investigation Report under Section 21 (a) of the Securities Exchange Act of 1934: The DAO, Exchange Act Release No. 81207 (July 25, 2017), available at

Ordinance instituting a cessation and abstention procedure, administrative procedure file n ° 3-20453 (August 6, 2021), available at


1. In accordance with Commission policy, Commissioner Crenshaw expresses her own opinions only and, as such, do not constitute official SEC policy or necessarily the opinions of her fellow Commissioners or Commission staff. .

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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