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Increasing scrutiny by SEC over DeFi raises concerns for innovation and competition

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The US Securities and Exchange Commission is taking a hard look at decentralized finance (DeFi), raising concerns about the potential stifling of innovation and competition within the rapidly evolving industry.

The US Securities and Exchange Commission is increasing its focus on the cryptocurrency sector, with Chairman Gary Gensler making it clear that DeFi will not be exempt. The Securities and Exchange Commission announced that it will reconsider plans to amend the definition of an exchange, which could include DeFi protocols such as decentralized exchanges.

In a rule initially proposed the previous year, the SEC seeks to include language aimed at the digital asset space.

Gensler emphasized that many cryptocurrency trading platforms already fall under the current definition of an exchange and are therefore required to comply with securities laws. He emphasized that investors in the cryptocurrency markets should receive the same protection as those in the traditional markets.

However, not all organizers welcomed the idea. SEC Commissioner Hester Pearce has criticized the proposal as overly broad, claiming it would impede innovation and competition in financial markets while protecting incumbents. She also argued that the plan’s vagueness could undermine basic First Amendment protections.

DeFi aims to simplify financial transactions such as loans and interest earnings by making them faster, easier, and more automated through decentralized applications. These apps make it possible to trade and borrow crypto assets without third party intermediaries or the need to disclose personal information.

While DeFi has won praise for the decentralization it offers to users, it has also been criticized for its lack of security, with experimental platforms vulnerable to hacking.

Decentralized exchanges (DEXs) such as Uniswap and Curve Finance are among the most popular decentralized applications. These platforms allow users to trade cryptocurrencies without revealing personal information.

Some users have expressed doubts about the SEC’s ability to enforce its regulations outside the United States, asserting that the agency cannot enforce compliance.

Critics in the crypto industry, such as Jason Allegrante, compliance officer at Fireblocks, have expressed concerns that applying traditional exchange regulations to decentralized protocols could stifle innovation in the US and drive companies abroad.

Using VPNs allows users to bypass location-based restrictions and access encryption applications even if they are blocked in their country. Some DEXs have already taken action to block US-based users from accessing their platforms.

The Securities and Exchange Commission has targeted prominent US cryptocurrency brands including Coinbase and Kraken, stepping up its crackdown after the sudden bankruptcy of digital asset giant FTX in November.

Gensler has consistently maintained that most digital assets fall under the definition of securities, and that regulators have been scrutinizing the DeFi sector for some time. Last year, the Treasury Department sanctioned the “currency mixer” app Tornado Cash, which North Korean hackers are using to allegedly launder money.

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