VCs and Insiders in DeFi Creating A “Two Tier Market” at The Expense of Retail, says SEC Commissioner

A top US Securities and Exchange Commission (SEC) raised new concerns about decentralized finance (DeFi) this week. In an op-ed published Tuesday, SEC Commissioner Caroline Crenshaw called the lack of transparency and pseudonymity of DeFi “structural hurdles” holding the market’s development back. The current ‘buyer beware’ approach of DeFi is “not an adequate foundation on which to build reimagined financial markets,” she wrote. While DeFi does represent “a panoply of opportunities,” Crenshaw said, it is “fundamentally about investing.” But those investments are in “speculative risks” which are taken in pursuit of passive profits from price appreciation, or “investments seeking a return in exchange for placing capital at risk or locking it up for another’s benefit,” she added. She further pointed out that venture capitalists and professional investors may be creating a “two-tier market.” While those insiders “reap outsized returns,” retail investors end up taking “more risks, get worse pricing, and are less likely to succeed over time.” According to Crenshaw, this makes it “very difficult” to know if trading volumes and asset prices reflect organic interest or a product of manipulative trading. While the SEC's role in DeFi is minimal, the SEC Commissioner said the agency is open to new ideas about how to integrate DeFi protocols into the regulatory regime.

“In conceiving a new financial system, I believe developers have an obligation to optimize for more than profitability, speed of deployment, and innovation. Whatever comes next, it should be a system in which all investors have access to actionable, material data, and it should be a system that reduces the potential for manipulative conduct.”

Global Banking Regulator On Crypto

In other news, the Basel Committee of banking regulators said on Tuesday that it would address how banks should set aside capital to cover potential losses from crypto. A public consultation will be launched later this month, said the committee. This consultation will be on a set of principles for the “effective management and supervision of climate-related financial risks at internationally active banks.” The Swiss-based committee of banking regulators said its members have also agreed on the need for a “conservative” risk-based set of minimum capital requirements standards for crypto.

“Accordingly, the committee will further specify a proposed prudential treatment, with a view to issuing a further consultative document by mid-2022.”