SEC commissioner says DeFi must address transparency and anonymity

Caroline Crenshaw, the commissioner of the US Securities Exchange Commission (SEC), has come out to address issues affecting the decentralized finance (DeFi) sector. Crenshaw aired her sentiments in an opinion piece on November 9, noting that the industry presents numerous opportunities. She also outlined the dangers of players in the industry failing to adhere to a protective regulatory framework.

Crenshaw’s article, dubbed DeFi Risks, Regulations, and Opportunities, was part of the first issue of The International Journal of Blockchain Law. In the publication, the SEC commissioner noted that it is imperative for the DeFi community to address the lack of transparency and pseudonymity to remain compliant with SEC rules.

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According to her, the DeFi sector is similar to the traditional finance system in many ways. For instance, some projects do not invest in compliance or adequate internal controls unless required. Additionally, some individuals will victimize others when the potential financial rewards are high.

On top of this, the absence of disclosure requirements and information asymmetries in both sectors puts affluent investors and insiders at an advantage at the expense of the smallest investors and those with the least access to information. To this end, Crenshaw claims it is not enough for DeFi projects to merely inform investors that investing in the sector comes with risks.

Regulation will help DeFi flourish

Per Crenshaw, the regulation would be good for the DeFi sector, seeing as they have helped US capital markets thrive. Urging the DeFi community to embrace regulation with an open mind, the SEC commissioner said securities laws do not only seek to burden innovators with obligations. Instead, address the above challenges, thus fostering more adoption.

Citing the shortcomings of the current DeFi sector, she said,

But, in the brave new DeFi world, to date there has not been broad adoption of regulatory frameworks that deliver important protections in other markets.

To this end, Crenshaw argues that lack of transparency often results in a two-tier market that sees professional investors and insiders get massive returns while small investors assume more risks and get poor pricing.

As for pseudonymity, she noted that DeFi markets are prone to manipulation, which is difficult to detect because transactions run on the blockchain. According to her, it becomes difficult to track minimize manipulation due to using bots and collusive trading. While the DeFi space touts pseudonymity as a feature, she believes investors prioritize making money over it.

To help address these issues, Crenshaw suggests that DeFi projects should engage in open discussions with the SEC.