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DeFi lending protocols become the new point of contention by the USSEC


The next big thing in crypto regulation discussions will be decentralized finance (DeFi) lending protocols. An investment agreement is described as “the expenditure of capital in a joint company with a strong likelihood of benefits to be earned from the labor of others”. This definition originates with respect to the “Howey Test” of US securities law. Security is a sort of investment deal, and security is regulated by the Securities and Exchange Commission. If a person sells securities to other people, they must normally register with the Securities and Exchange Commission (SEC). Additionally, they are required to produce a prospectus, maintain audited financials, and so on.

A person can transfer them under an exception to the laws. The exception allows them to sell it if they solely sell it to people who are not citizens of the United States, or to “accredited investors”. The latter term roughly translates to people in possession of substantial wealth. It appears that subjecting DeFi to these regulations would be cumbersome and that many in the DeFi community would want to be excluded from or disregard them.

There is no one for the SEC to prosecute if shareholders put their bitcoin into a pot governed by a smart contract because it is not owned by individuals. It could possibly sue the developers who drafted the agreement or those who marketed it on media platforms. However, there is really no holder of the securities to sue in much the same way there is for a firm’s stock sale. The Point Is DeFi contains some actual originality. For example, it is very different from the types of securities offers that Congress considered when enacting the main U.S. securities regulations in the 1930s. However, it is largely equivalent to other offers, therefore, there will be issues.

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