Commissioner Pierce of the Securities and Exchange Commission believes that the only way for DeFi founders to avoid financial regulation is to ensure complete decentralization from the start.
In a recent blog post, Hester Pierce of the Securities and Exchange Commission of the United States, also known as “Crypto Mom,” expressed concern about widespread “shadow-centralization” in the decentralized finance (DeFi) sector.
In an August 4 discussion with outspoken DeFiWatch founder Chris Blec, which was streamed live by The Defiant, the SEC commissioner noted that decentralized organizations and distributed finance (DeFi) are new concepts for regulators and that: “having a peer-to-peer system that doesn’t have central intermediaries is very different from what we’re normally dealing with.”
“If you want to be decentralized, you really need to be decentralized, and that is going to then put you in a different category from the perspective of regulators because that’s just not something that we’ve dealt with before.”
“If regulators can find a centralized part or group of people that they can grab hold of, they will grab hold of them. So I think it’s just good to be cautious about how you build things because, down the road, it could have regulatory implications,” she added.
Blec inquired about Pierce’s thoughts on the best path forward for developing decentralized protocols, specifically whether founders should strive to achieve the same level of decentralization as Bitcoin, or whether they should start “really cautiously and then running towards regulation” to avoid running afoul of the law.
Pierce responded that the best path forward is “really cautiously and then running towards regulation.” According to the commissioner, existing regulations have been written in such a way that “any entity or person that is involved in the financial industry is probably going to come under at least one regulatory framework.”
According to Pierce, DeFi founders who believe they are engaging in new activities that do not fall within the framework of existing legislation should contact regulators and “figure out if there is an alternative way […] to comply.”
“If you want to make a case that you’re something different than the CeFi or TradFi system, then you have to show that you’re doing something radically different, which from my perspective, requires decentralization.”
“If the trust is really coming from the code, that’s something very different than if the trust is coming from one company or a group of people,” she added.
The commissioner also expressed concern about the prevalence of “shadow-centralization” in the DeFi sector, where opaque governance structures can result in a protocol being subject to centralized control despite the fact that it is marketed as decentralized.
To the contrary, Pierce urged regulators to adjust their approaches in order to keep up with decentralized innovation, stating that “regulators need to do a better job of figuring out how to work with innovators.”
Continuing, she stated that this is one of the reasons why our financial system is so concentrated. It is because the only people who have the financial wherewithal and legal resources to wait for approvals are those who already have a lot of money and access to excellent legal counsel.
Pierce responded to the question of what Satoshi Nakamoto’s experience would have been like if he or she had approached the SEC before launching Bitcoin with the following statement:
“It’s 2021, it would be very likely that Satoshi would still be […] trying to get a no-action letter.”