Hester Pearce, the commissioner of the US Securities and Exchange Commission, explained in an exclusive interview with Cointelegraph that decentralized financing, also known as DeFi, creates new challenges for the SEC.
Pearce, nicknamed “Crypto Mom” for his interest in digital asset innovation, said DeFi’s fast-growing sector has led to a number of unresolved legal issues:
“DeFi challenged the SEC in a similar fashion to what happened during the ICO boom in 2017. The difference is that DeFi’s speed was actually much faster. I also find legal issues on DeFi’s side much more difficult to solve.”
While Pearce said the rules for DeFi projects could override the jurisdiction of the SEC, it is likely that some of these projects affect securities laws. John Whelan, CEO of Santander Bank and chair of the Ethereum Enterprise Alliance, told Cointelegraph that DeFi has the financial capacity to create independent programmable digital securities in the future, Pearce said.
However, this remains a long-term goal as most Defi’s offerings consist of non-cash tokens and are used to fund blockchain projects. However, Pearce advised DeFi members to be cautious. Speaking to Whelan, who attended Ethereum’s Enterprise – Asia Pacific online conference, Pearce said the crypto community should be careful when setting up DeFi projects:
“I warn people not to think about what they’re making and think about what looks like conventional security. If that’s the case, talk to the SEC because people could get in trouble if they develop one of these things. That was my advice.”
DeFi asks the SEC to eliminate middlemen
In addition to the legal hurdles, Pearce noted that the goal of decentralized financing is to eliminate third-party intermediaries such as banks and exchanges.
However, Pearce mentioned that the SEC relies on these brokers. “Our rulebook is based on the idea that you have these mediators. When you take them out of your eyes, our regulatory work becomes very difficult.”
Not only is this a problem for the SEC, but the lack of DeFi brokers can be the culprit behind a lot of hacks and scams in the space. A report published by analyst firm CipherTrace showed that 45% of all cryptocurrency hacks in the first half of 2020 were targeting DeFi companies. In addition, moderators must be present for DeFi apps to be used by organizations and companies.
However, Pearce noted that the lack of innovation in the financial industry is partly due to regulatory barriers. In a direct conversation with Willan Pearce, she explained that regulatory barriers protect traditional financial institutions from competition, and she is trying to change that. “I want to see what happens when you have a really competitive stadium,” said Pierce.
Eth 2.0 returns the Safe Harbor case
Despite DeFi’s concerns, Pierce is optimistic about the recent launch of the Ethereum 2.0 beacon network, which will definitely lead to new projects in the Ethereum community.
Given new developments on the Ethereum network, Pearce explained that the proposed Safe Harbor architecture for blockchain projects is likely to evolve further. She first announced her proposal in August 2019 and presented it in February at the International Blockchain Conference in Chicago. In short, the Safe Harbor proposal gives network developers a three-year deadline to create decentralized projects without worrying about SEC lawsuits, provided they meet basic reporting standards at the start of this period.
Pearce said she is currently working on version 2.0 of the Safe Harbor framework, but she does not expect the proposal to be ready anytime soon. The commissioner noted: “Exit may be slower than the launch of Ethereum 2.0.”
While this is the case, Pearce acknowledged that Ethereum 2.0 is proof that the Safe Harbor architecture still makes sense. She also expressed her hope that the President of the Supreme Education Council would like to work on issues related to digital asset innovation.
Of course, Ethereum 2.0 could pose new challenges to the SEC. Whelan noted that, from a technical perspective, moving from a potential demonstration of a working consensus mechanism to a compromise to conclusive evidence of settlement efforts could solve technical problems while raising new legal issues at the Securities and Exchange Commission. Whelan SA:
Ethereum 2.0 has a built-in final settlement, which means the blockchain update will be final after a while and cannot be changed.