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Decentralized Finance: The Next Frontier of SEC Enforcement

The SEC’s push to regulate the next generation of blockchain-based applications will likely give rise to disputes and enforcement actions, particularly in the developing decentralized finance (DeFi) space. Although DeFi has the potential to enhance or replace traditional financial products by speeding execution and reducing transaction costs using blockchain technology, the SEC presumes that actors in this space are generally offering “securities” subject to its jurisdiction.  

For example, in addition to the SEC’s continued targeting of allegedly fraudulent ICO offeringsChairman Gary Gensler has repeatedly called for cryptocurrency exchanges to register with the SEC. Stressing investors’ protection, Gensler’s position is that platforms that trade or lend crypto are subject to SEC regulation.  Meanwhile, the SEC has proposed amendments to Reg ATS that appear to define a securities “exchange” broadly enough to cover those who create protocols for decentralized crypto trading.

In the SEC’s first action involving DeFi technology, the SEC sued individuals and an entity offering a decentralized token product known as DeFi Money Market. The SEC found that the smart contracts in that matter qualified as securities subject to regulation because they were offered as investment contracts under the Howey test.

The SEC has also informed at least one cryptocurrency exchange that it would be sued if it offered a product enabling customers to earn interest on crypto deposits. Coinbase sought SEC approval to launch a stablecoin-based lending program, which resulted in a Wells notice from the SEC, warning the company that it would be sued if the program went forward.  Shortly after, Coinbase decided to cancel its launch of the program.

State regulators have also taken action against another major crypto institution for offering a similar type of product, alleging that it sold unregistered securities by offering interest to customers who made crypto deposits with the company.

While innovation continues to proceed at a breakneck pace, we expect the SEC will work harder than ever to keep up, and to continue to use a heavy hand on the DeFi industry and other crypto-adjacent players, including pursuing individual defendants in the space.

Dorothy Murray, Joshua M. Newville, Todd J. Ohlms, Seetha Ramachandran, Jonathan M. Weiss, Julia Alonzo, James Anderson, Julia M. Ansanelli, William D. Dalsen, Adam L. Deming, Reut N. Samuels and Hena M. Vora also contributed to this article.

© 2022 Proskauer Rose LLP. National Law Review, Volume XII, Number 41
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About this Author

Partner

Steven Baker is a partner in the Litigation department and a member of the International Arbitration group. He has over 25 years of experience advising clients on complex, often multi-jurisdictional disputes in a wide range of industries, including asset management, technology, life sciences, financial services and defence sectors. He also has extensive experience advising upon and managing disputes for clients involving major technology or telecommunications projects and their financing, technology licensing and misappropriation of trade secrets.

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+44.20.7280.2238
Margaret A Dale, Commercial Litigation, Proskauer Rose Law Firm
Partner

Margaret Dale is a Partner in the Litigation Department, resident in the New York office. Her practice focuses on commercial litigation, including class action defense, as well as intellectual property, privacy and data security, corporate governance litigation, securities litigation, and regulatory and internal investigations. She also represents and counsels clients in art law matters. 

212.969.3315
Michael R. Hackett, Litigation Attorney, Proskauer Law Firm
Associate

Michael R. Hackett is an associate in the Litigation Department and a member of the Asset Management Litigation practice. His practice focuses on disputes and regulation involving private funds, including private equity, venture capital, hedge, real estate and private credit funds, as well as other limited partnerships, where he regularly advises funds, fund sponsors, investment advisers and institutional and individual investors.

Mike’s experience representing private fund clients runs the gamut, from control contests within advisers, to...

617-526-9723
William Komaroff Litigation White Collar Attorney Proskauer Law Firm New York
Partner

Bill Komaroff is a partner in the Litigation Department and White Collar Practice Group. He has a nationwide federal practice focused on corporate defense and investigations, counseling and defending institutional and individual clients in connection with a broad array of complex government investigations, prosecutions and civil disputes.

Bill also has served as a member of the Criminal Justice Act Panel for the District Court for the Southern District of New York.

From 2003 to 2007, Bill served as an Assistant U.S....

212-969-3975
Kirsten Lapham FInancial Services Attorney Proskauer Rose Law Firm, United Kingdom
Partner

Kirsten Lapham is a partner specialising in financial services regulation. She advises a broad range of both institutional and individual clients on a variety of financial services regulatory and compliance issues. Her practice has a specific emphasis on the regulatory issues arising under the AIFMD, and MiFID II for a range of EU and indirectly impacted firms outside of the EU.

Experience in this area includes advising multiple clients on the EU marketing and registration regimes and overlaying local regulatory considerations, such as the U.K. retail distribution...

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