DeFi advocates push for SEC policy clarity
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Developers in the blockchain world often build apps to improve the user experience of interacting with the autonomous robots on the internet — programs running with no human in charge.
Why it matters: Policy makers will have to decide which of these gateways need to be regulated "brokers" in our crypto-powered future, and which can be trusted to operate without ongoing supervision.
Driving the news: The DeFi Education Fund, a trade group, and a16z Crypto, a major investor, have drafted recommendations to the SEC for the creation of a safe harbor — a carve-out from registration requirements — for certain blockchain-based financial apps.
- The proposal is a direct response to the request for input from the SEC's Crypto Task Force chair, Hester Peirce.
Between the lines: In traditional finance, a broker is defined as anyone who facilitates transactions for clients — things like handling trades, keeping records and holding customer funds.
- On blockchains, many powerful protocols run entirely on their own. The code can't be altered, and there's no one at the wheel.
- But most people don't have the technical proficiency to interact directly with these protocols — so they need applications that look like more familiar websites to use them.
Zoom out: The DeFi Education Fund and a16z Crypto are suggesting that the safe harbor cover "neutral software interfaces to permissionless and autonomous blockchain systems."
- Put simply, apps that don't take custody of your funds, pitch investment products or make decisions for you — they're just tools you control yourself.
For example, routers are apps that will let a user indicate a trade he or she wants to make, and the router will recommend which of the many decentralized exchanges offer the best price and lowest fees at that moment.
- The router will also write the order to make the trade for the user to send to the exchange, but their funds will still go straight from the user's wallet to the exchange. The router will never take custody.
The four conditions the groups say an app must meet to qualify for safe harbor:
- No custody: The app never holds users' assets, like traditional brokers usually do.
- No discretion: It simply offers consistent operations based on known rules.
- No solicitation: It's up to the user to show up knowing what they want to do.
- Immutable code: It only interacts with software that can't be meddled with by humans.
What they're saying: Apps meeting these standards do "not expose users to the trust dependencies and consequent risks that the federal securities laws are intended to mitigate," Miles Jennings, general counsel of a16z Crypto and Amanda Tuminelli, director of the DeFi Education Fund, among others, write in the letter.
Flashback: They cite the decision on Coinbase's Wallet in the SEC's case against the exchange, where the judge noted that Coinbase never has control of assets in the wallet it built for users.
What's next: It's clear the SEC is going to put some ideas out before long.
