SECURITIES & EXCHANGE COMMISSION CRYPTO TASK FORCE ROUNDTABLE
On June 9, the Securities and Exchange Commission (SEC) held a final roundtable, entitled “DeFi and the American Spirit,” in its “Spring Sprint Toward Crypto Clarity.”
The agenda and panelists’ biographies can be found here. Chairman Atkins’ keynote remarks are available here, with Commissioner Peirce’s available here, Commissioner Uyeda’s here, and Commissioner Crenshaw’s here.
Key Takeaways
- Panelists discussed cost-benefit analyses of risks and opportunities presented by decentralized finance (DeFi), with discussions referencing the need to leverage blockchain technology in an informed way, alongside applying tailored flexibility and principles-based certainty in regulation.
- The discussion outlined opportunities for enhancing compliance, risk management, and market functionality through innovative tools like zero-knowledge proofs, automated compliance, and modular systems.
- Comments cited how DeFi can promote transparency, reduce reliance on intermediaries, and enable more efficient market participation when appropriately understood and integrated into regulatory frameworks.
Commissioner Statements
- Chairman Atkins highlighted that a core feature of blockchain technology is the ability for individuals to have self-custody of crypto assets in a personal digital wallet. He voiced his support for affording greater flexibility to market participants to self-custody crypto assets, especially where intermediation imposes unnecessary transaction costs or restricts the ability to engage in staking and other on-chain activities. He emphasized the SEC’s work to propose fit-for-purpose rules of the road for on-chain financial markets.
- Chairman Atkins criticized how the previous administration undermined innovation in self-custodial digital wallets and other on-chain technologies by asserting through regulatory actions that the developers of such software may be conducting brokerage activity. He affirmed that engineers should not be subject to the federal securities laws solely for publishing the software code, highlighting that blockchain technology makes possible an entirely new class of software that can perform these functions without an intermediary.
- Chairman Atkins stated that the SEC should not allow century-old regulatory frameworks to stifle innovation with technologies that could upend, improve, and advance the current, traditional intermediated model. He outlined that on-chain self-executing software systems have proven to be resilient in the face of crises, with many continuing to operate as designed pursuant to open-source code while centralized platforms waivered and failed under recent stresses.
- Chairman Atkins explained that most current securities rules and regulations are premised upon the regulation of issuers and intermediaries, such as broker-dealers, advisers, exchanges, and clearing agencies, without contemplating that self-executing software code might displace them. He committed to exploring whether further guidance or rulemaking may be helpful for enabling registrants to transact with intermediaries seeking to administer on-chain financial systems in compliance with applicable law.
- Chairman Atkins referenced his staff directive to consider a conditional exemptive relief framework or “innovation exemption” that would expeditiously allow registrants and non-registrants to bring on-chain products and services to market. He described how an innovation exemption could help fulfill President Trump’s vision to make America the “crypto capital of the planet” by encouraging entities willing to comply with certain conditions to innovate with on-chain technologies in the U.S.
- Commissioner Peirce stated that the Task Force hit the ground running in the sprint, but it is more likely to become a marathon toward regulatory clarity, and that even reaching a decision not to regulate requires discussion. She framed how DeFi defies traditional, permissioned intermediaries and enables individuals to engage with peers through an open protocol on the same transparent terms, with no need for consent from a centralized gatekeeper. She emphasized that at its core, DeFi, enabled by blockchain technology, is the freedom to transact without permission, interference, or intermediation.
- Commissioner Peirce noted the ability to publish written material without permission, citing code and DeFi software protocol as protected speech under the First Amendment. She said the SEC has no authority to demand pre-publication approval, even for code that could be used to exchange securities, and must not infringe on First Amendment rights by regulating someone solely for publishing code used by others to carry out regulated activity. She emphasized that if someone else violates the law using that code, the user should be held accountable, not the developer. She differentiated that when a developer does more than merely publish the protocol, such as operating, administering, or maintaining a platform through which the code is accessed, taking custody of assets, or executing transactions on clients’ behalf, that conduct may be subject to regulation.
- Commissioner Peirce highlighted that centralized entities using DeFi protocols written by others cannot avoid regulation by simply applying a decentralized label, referencing “DINO,” or “Decentralized in Name Only”. She cited that centralized entities bring risks common in traditional finance, such as fraud, conflicts of interest, principal-agent problems, and information asymmetries, as precisely the problems DeFi was intended to address. She said that regarding centralized entities, the SEC should focus on protecting investors not from their own peer-to-peer use of open-source code, but from intermediaries who introduce traditional financial risks under the guise of decentralization.
- Commissioner Uyeda raised how the SEC’s treatment of DeFi and other emerging technologies over the past four years was not conducive to regulatory transparency and discouraged DeFi entrepreneurs from engaging with the Commission. He commended how the Task Force has changed the SEC’s posture on crypto, embraced difficult regulatory questions, and promoted transparency by engaging with market participants, driving innovation and change. He emphasized that this SEC is committed to high-quality regulation, which takes time, and that administrative processes matter.
- Commissioner Uyeda discussed how the path toward perfect regulation begins with public input and that by learning from DeFi innovators and advocates, the Commission has a better chance of effectively regulating securities transactions involving DeFi and protecting users of DeFi services and products. He highlighted how knowledge and insights about DeFi’s development and the regulatory barriers preventing growth will help the Commission attempt to strike the proper balance between its role as a regulator and its mandate to foster competition, efficiency, and capital formation.
- Commissioner Uyeda said the SEC should not refrain from oversight of novel areas simply because it requires thinking beyond the existing framework. He raised how the legacy regulatory regime under the federal securities laws presupposes the existence and necessity of numerous intermediaries, asking whether such presumptions remain necessary. He questioned in what situations DeFi systems and smart contracts potentially eliminate the need for a financial intermediary, and in what situations should DeFi systems be deemed to fall outside the scope of the securities laws. He also questioned what key safeguards are necessary when the securities laws apply to these arrangements.
- Commissioner Crenshaw outlined how crypto is not a monolith emphasizing that it is better to do it right than fast in the face of heightened expectations of rolling out major changes quickly. She stated how the opportunities and challenges of DeFi require industry and regulatory collaboration to develop compliant solutions. She reiterated her prior concerns regarding market structure, transparency, and retail investor protection.
PANEL DISCUSSION
Panelists
- Moderator: Troy Paredes, former SEC Commissioner
- Jill Gunter, Espresso Systems
- Michael Jordan, DBA
- Omid Malekan, Columbia Business School
- Michael Mosier, Arktouros
- Rebecca Rettig, Jito Labs
- Gabe Shapiro, MetaLeX
- Peter Van Valkenburgh, Coin Center
- Erik Voorhees, Venice AI
- Kevin Werbach, Wharton School
Discussion
- Paredes questioned whether the existing intermediary-centric regulatory framework can be reconciled with DeFi’s inherently disintermediated structure. He asked whether policymakers should adapt the current model to fit DeFi or instead acknowledge its limitations and design a fundamentally new regulatory construct aligned with decentralized systems.
- Paredes noted that while disclosure is often viewed as a less burdensome alternative to regulating conduct or activities, it can be difficult to implement effectively and can be potentially counterproductive. He discussed how crafting a disclosure regime involves complex questions about what is disclosed, how, when, and how often. He emphasized that effective disclosure depends on how the recipients engage with the information, particularly whether it enhances or frustrates their decision-making.
- Rettig discussed how defining decentralization is not essential to determine whether an actor should be regulated, emphasizing that DeFi is better understood as a philosophy of disintermediation rather than a fixed structure. She recommended shifting regulatory focus from definitions to specific activities, especially as DeFi’s functions do not parallel traditional finance. Cited examples include the complexity of control via multisignature wallets and the absence of clear analogs to centralized mechanisms like exchange circuit breakers.
- Rettig outlined three core risks in DeFi: cyber risk due to reliance on autonomous code, system management risk regarding hidden or undeclared control, and illicit finance risk arising from how third parties use the systems, often in ways unlike traditional finance.
- Rettig said she is not sure the SEC has broad jurisdiction to create a general disclosure framework for crypto unless such authority is granted through additional legislation. She emphasized that regulators must understand the technology before giving advice about where the law intersects or before regulating disclosure regimes. She also said that in a true or genuine DFI protocol, it will not have the type of intermediation that will bring the concept of broker-dealers back in.
- Van Valkenburgh discussed that even if “same risk, same regulation” questions may arise, it would not justify imposing a prior restraint on a U.S. developer’s ability to publish software. He noted their jurisprudence distinguishing between speech, which is protected, and professional conduct that primarily involves speech, which can be subject to restraint and regulation.
- Van Valkenburgh argued against a prescriptive regulatory regime that forces participants into buckets defined ex ante by a regulator, calling for a principles-based regime and common law that is bottom-up. He stated that an organic regulatory model is preferable, with people defining their own terms and can be prosecuted for fraud if they fail to live up to those terms.
- Van Valkenburgh raised whether there are areas where the SEC can help define what constitutes negligence, and whether the SEC has jurisdiction over matters relevant to securities transactions that could help obviate the economic loss doctrine. He discussed how this could allow for the development of more nuanced, bottom-up legal solutions rather than reasoning about registration in a vacuum.
- Van Valkenburgh said that digital identities and zero-knowledge proofs work in tandem and are a promising area for SEC contributions. He highlighted the opportunity to improve gating and permissions without requiring full collection of users’ personal information by leveraging the capabilities of the technology itself. He emphasized that while technology creates risks, it also offers opportunities for enhancing compliance and risk management.
- Voorhees highlighted the market-based reaction and market exploration in crypto, pursuing a frontier over complacency. He said that markets occur without any central power and do not need a regulator to enable them, with smart contracts serving as machines of perfect regulation. He said the key point is not that smart contracts are perfect regulators, but that they represent a step-function improvement over human regulators. He argued that shifting to a non-arbitrary system of rules is preferable to one based on human discretion, stating that cryptocurrency, blockchain, and DeFi should be viewed as tools of ultimate order.
- Mosier outlined the development of varying risks, highlighting the opportunity of automating risk detection over injecting intermediaries and leveraging different activity-based risks. He pointed to zero-knowledge proof as a means of deterring illicit activity and risk, citing FinCEN’s 2019 guidance and initiative on privacy-enhancing technology. He said the SEC has a tremendous opportunity in its cost-benefit analysis to consider both market manipulation risks and solutions like zero-knowledge proofs, noting that basic thresholds, such as confirming accredited investor status, can be verified at transaction speed and automate risk detection.
- Gunter emphasized the orderly performance of DeFi protocols during the FTX collapse and urged regulators to consider not only risks but also the transformative potential of the technology. She highlighted that blockchain is modular, not monolithic, with layered systems where pinpointed control may or may not exist at different levels. She discussed how one of the risks of true decentralization is the lack of recourse, especially with the presence of legacy software and the absence of self-governance guidance.
- Gunter said interoperability is critical, with markets needing the freedom to emerge and evolve independently while also having the ability to collide. She emphasized the importance of enabling these systems to interact safely and securely, with appropriate disclosures for consumers using them. She said it is critical not to impose overly burdensome disclosure or regulatory regimes that could drive out well-intentioned actors, alongside emphasizing the importance of establishing transparency norms to enable those creating best practices that protect consumers, retail users, and investors to thrive and compete with less scrupulous participants.
- Malekan outlined how the problems of the traditional financial system are increasingly apparent in a global digital economy, noting that it is designed to sometimes present the veneer of continuous operation, but actual settlement is often delayed. He discussed how it lacks transparency, necessitating heavy regulation to understand internal operations, and that it is highly fragmented, with many national databases that do not communicate. He described this as an opportunity to re-architect principles, starting with the broad agreement that continuous operation, transparency, and interoperability are all desirable. He said that the market will want a spectrum of decentralization and that industry could do a better job of policing.
- Malekan said the seize-and-freeze function of stablecoins is a key part of the CLARITY Act. He emphasized that stablecoins are central to DeFi, and if issuers begin seizing or freezing tokens within DeFi systems, it will break DeFi.
- Werbach said smart contracts are only as perfect as the software they run on, and that software can be imperfect. He emphasized the need for confidence despite vulnerabilities, noting that while markets will go where they want, that direction may not align with the public interest. He stated that U.S. capital markets are the most innovative not because they are the least regulated, but because of a history of effective regulation as something that should guide the approach to DeFi.
- Werbach explained how traditional trust structures rely on central actors, such as intermediaries or government backstops, and while still valuable, they have limitations. Blockchain introduces a new form of trust, diffused across actors and activities, removing a single point of failure or administrative control.
- Werbach referenced his work with the World Economic Forum, including the 2021 reports “DeFi: Beyond the Hype” and “DeFi: Policymaker Toolkit.” He said the toolkit outlines six broad categories of DeFi risks, not all of which require regulation, and urged a focus on responses that minimize costs to innovation and core values like freedom of speech. The risks include financial risks, operational risks like key management, governance, legal risks like illicit use, and emergent risks like flash crashes and flash loans. He said regulators should catalog these risks, determine legally appropriate responses, and, where existing law is insufficient, consider how it might need to change.
- Werbach emphasized the value of regulators engaging in scenario planning to consider where this could go if DeFi receives regulatory clarity and potentially dominates the marketplace, and what that would mean for the application of securities laws, especially if tokenization of equities and other securities advances. He also noted that stablecoins are not DeFi themselves but are essential to DeFi.
- Jordan stated that tokens are broken, with an environment where it is harder to do things the right way, highlighting it as an issue the SEC can help with and calling for a golden bridge that everyone crosses. He attributed concerns to off-chain agreements and activities, with market maker agreements where people will pay for transaction volume that is not legible to the market. He emphasized the need to regulate the activity, not technology or agreement.
- Shapiro discussed facts-and-circumstances-based tests like the Howey test, stating that no one wants to analyze every system in excruciating detail each time. He stressed the importance of legal recognition of the difference between truly decentralized autonomous systems and those merely using blockchain without decentralization. He highlighted that while the lines may not be perfect, they are necessary, acknowledging that edge cases will remain, handled through no-action letters or litigation.
- Shapiro said that when a single player accumulates significant vertical integration, it creates a concentration of risk that effectively makes that entity a trusted party, even within otherwise trust-minimized systems. He questioned whether this should be viewed as centralization or simply as vertical integration, with Rettig following up by asking what the limiting principle is in such scenarios.
- Shapiro highlighted that while the disclosure regime has evolved into a form of conduct regulation, such as when environmental disclosures influence company behavior, it is important to return to the core principle that investors and operators should have access to all material information needed to make informed decisions. He argued that Sarbanes-Oxley-style requirements, with extensive auditing and controls, are inapplicable to crypto, and that disclosure should focus on potential conflicts of interest, opportunities for collusion, and system vulnerabilities. He emphasized that when information is already transparent and on-chain, additional disclosure should not be required, with crypto warranting a disclosure regime tailored to its structure and aligning with the SEC’s strengths.