Decentralized Finance Took Center Stage in Washington as the SEC's Latest Policy Roundtable Spotlighted Code-Driven Innovation

Decentralized finance took center stage in Washington as the SEC's latest policy roundtable spotlighted code-driven innovation, individual empowerment

The U.S. Securities and Exchange Commission (SEC) is placing the potential of decentralized finance (DeFi) at the heart of its policy thinking, aiming to balance innovation with investor protection.

At the final session of the Crypto Task Force’s Spring Sprint roundtable series on June 9, SEC Commissioner Hester Peirce spoke about how DeFi aligns with core U.S. values. The event, titled "DeFi and the American Spirit," marked the culmination of a months-long initiative focused on major regulatory themes in crypto, including custody, tokenization, and trading.

The sessions, moderated by former SEC Commissioner Troy Paredes, were instrumental in shaping ongoing SEC policy discussions around digital assets, said Peirce, who is known for her advocacy of crypto regulation.

DeFi, a term used to describe decentralized financial applications on blockchains, has been a subject of debate within the SEC. Some commissioners, including Peirce, see it as an innovation that could create new markets and services, while others have expressed concerns about potential regulatory arbitrage and the need for centralized oversight.

The Build Back Better Act, passed by Congress in 2021, tasked the SEC with studying the implications of DeFi and issuing a report within 180 days. The report, released in March, concluded that DeFi presents both opportunities and risks, and that the SEC’s existing authorities are sufficient to oversee this emerging domain.

During the session, Peirce differentiated DeFi from traditional platforms, highlighting that it's not a service provided and controlled by intermediaries, but rather a system where users interact directly with open-source protocols.

"DeFi is not a place people go to access services that someone else provides and controls; it is software code that people use to engage in the activity of transacting without a centralized intermediary," explained Peirce.

The commissioner also emphasized the constitutional protections for those who write and publish such code. "The SEC must not infringe on First Amendment rights by regulating someone who merely publishes code on the basis that others use that code to carry out activity that the SEC has traditionally regulated," she stated.

"If somebody else subsequently violates the law using the software protocol, the user—not the developer of the software—should face the music," added Peirce.

In her remarks, Peirce used the term "DeFi-In-Name-Only (DINO)" to warn against deceptive efforts to brand centralized services as DeFi.

"We should be wary of efforts to expand the scope of SEC regulation to encompass the activity of software developers or users in a manner that does not closely align with the SEC’s traditional regulatory role or serve the best interests of investors," said Peirce.

The commissioner maintained that the SEC’s efforts are best spent protecting investors "from the providers of financial services, rather than from their own use of open-source software code to engage in transactions with their peers, or from the writers of such code."

In the same vein, Paredes highlighted the importance of focusing on clear threats to investors amid the hype surrounding new technologies.

"We need to be mindful of the SEC’s limited resources and ensure that our regulatory efforts are concentrated on the actors and activities that pose the most significant risks to investors," said Paredes.

The session’s participants discussed the implications of applying traditional financial regulatory frameworks in the context of DeFi. A key theme was the need for a balanced approach that preserves individual rights while ensuring legitimate regulatory oversight of centralized actors.