The U.S. Securities and Exchange Commission (SEC)’s warning shot that decentralized financing (DeFi) may be added to its expanding definition for what constitutes a securities exchange last week is the latest step in formalizing what Chairman Gary Gensler had been saying: crypto belongs in the world of securities and will be regulated as such.

The crypto industry has long asked for the SEC to provide specific rules and guidance that would allow digital-assets companies to be certain about their compliance or how they can avoid the agency’s jurisdiction. DeFi’s inclusion in the agency’s proposal for a revised exchange definition is a further indication that crypto financial movements will not receive tailored regulations. The agency, on the other hand, is making specific adjustments to its regulations to ensure that crypto will be held accountable to existing securities laws.

Hester Peirce, SEC commissioner, said on Monday, “We’re not going to adjust to this new technology.” She went on to criticize the move made last week, to which she was opposed. “If you do not look like the incumbent firms, we will be happy to kill you off or drive you offshore or force you to become a centralized organization.”

In its latest move, the SEC voted by a margin of 3-2 in favor of reopening an existing proposal in order to broaden how it defines operations which need to be regulated under securities exchange regulations. This is to bring in new technologies, including DeFi. Crypto operations will have to make major changes to comply with the SEC’s initiative and others. Some of these changes may threaten the uniqueness of their approach to investing and money.

Jason Gottlieb, an attorney at Morrison Cohen who represents crypto clients in New York, said that the SEC was simply trying to ban DeFi protocols. The SEC, by doing this, is substituting their own opinions over Congress’ prerogative in a major issue, which is central to the future American economy.

Gottlieb stated that the change would “bring decentralized software protocol into a regulatory structure which was not designed for them and with which, literally, they cannot comply technologically.”

Gensler stayed true to his usual message when the commission voted to approve the proposal for the definition of an exchange. The rule will now be open for 30 days to receive comments before it can be finalized by another vote.

Gensler stated that “investors on the crypto market must be protected by the same securities laws as those in other markets.”

The SEC is now largely positioned on the regulatory battlefield:

  • has warned Coinbase that its enforcement action will soon be coming.
  • It labelled a number tokens, yield-products and staking service as securities.
  • In addition to the vote last week to include DeFi in its definition of an exchange, last year’s proposal by the agency to redefine securities dealers who could also be ensnared into DeFi activity.

Gensler stated in prepared testimony for a hearing on Tuesday of the House Financial Services Committee that “nothing about crypto markets are incompatible with securities laws.” Gensler is expected to face the Republican majority committee for the very first time in this year. He will be interrogated on his crypto views, which often run counter to GOP values.

Gensler will tell lawmakers that “calling yourself a DeFi Platform, for example, is no excuse to violate the securities laws.”

The SEC’s crypto policy could only be changed by legislation passed by Congress or court decisions, such as the result of the legal dispute it has with RippleLabs about whether XRP should be considered a non-registered security.

The latest action taken against Bittrex, on Monday, and the case brought against Beaxy last month are putting Gensler’s claims that crypto exchanges today are trying to play multiple roles (and at times conflicting ones) without registration into practice. Gensler has criticized crypto platforms that set themselves up as brokerages, clearinghouses, custody operations, and exchanges. Each of these should be properly registered under federal oversight.

DeFi advocates had hoped that their decentralized approach could keep them out from such regulations, by placing the transactions on a level where they can be done peer-to-peer without having companies act as intermediaries. The SEC’s final definition of an exchange will not suffice if it approves the final version.

Joshua Ashley Klayman is the head of Linklaters’ crypto practice in New York. She added that the crypto industry is full of “exceptionally intelligent people” who are going to find ways to keep on. “It might not look like it does now, but the industry will continue evolving.”

Staff at the SEC were unable to answer any of her questions before the vote. The proposal did not define DeFi, nor did it specify how these transactions would fit within its rules. However, SEC officials stated that such operations would be assessed on a case-by-case basis against the agency’s standards.

Peirce explained that the final decision will be made by the enforcement division.

Nikhilesh De contributed reporting.

Nikhilesh De.