Another DeFi Yellow Flag Thrown By An SEC Commissioner – Technology

United States:

Another DeFi Yellow Flag Thrown By An SEC Commissioner

The decentralized finance (DeFi) community must address issues
of “transparency” and “pseudonymity” before it
can deliver on its “new and interesting potential,” cautioned SEC Commissioner Crenshaw in a
recent article published in the inaugural issue of The
International Journal of Blockchain Law.

Noting that not one DeFi participant within the SEC’s
jurisdiction has yet to register with the SEC, Commissioner
Crenshaw urged DeFi participants to engage with agency staff,
warning that “without a common set of conduct expectations,
and a functional system to enforce those principles, markets tend
toward corruption, marked by fraud, self-dealing, cartel-like
activity, and information asymmetries.”

1. Transparency

Commissioner Crenshaw attempted to debunk the idea that DeFi is
“more egalitarian and transparent” than traditional
finance (TradFi).

She stressed that “retail investors are already operating
at a significant disadvantage to professional investors in
DeFi” because “much of DeFi is funded by venture capital
and other professional investors,” and these arrangements are
rarely disclosed to the public.

Commissioner Crenshaw further expressed her concerns that the
resulting information asymmetry “contributes to a two tier
market in which professional investors and insiders reap outsized
returns while retail investors take more risks, get worse pricing,
and are less likely to succeed over time.”

2. Pseudonymity

Pseudonymity in blockchain parlance refers to the fact that
visibility of transactions is limited to the public address
“that sent or received assets, but not the identity of the
person who controls it.”

Commissioner Crenshaw shared her observation that pseudonymity
“makes it much easier to conceal manipulative activity and
almost impossible for an investor to distinguish an individual
engaging in manipulative trading from normal organic trading
activity,” and further advised that DeFi “projects that
solve for pseudonymity are more likely succeed.”

{ Without a common set of conduct expectations, and a
functional system to enforce those principles, markets tend toward
corruption, marked by fraud, self-dealing, cartel-like activity,
and information asymmetries.

https://www.sec.gov/news/statement/crenshaw-defi-20211109

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

POPULAR ARTICLES ON: Technology from United States