The SEC’s drive to regulate the next generation of blockchain-based apps will undoubtedly result in legal battles and enforcement proceedings, especially in the developing Decentralized Finance (DeFi).

DeFi has the potential to improve or replace existing financial products by employing blockchain technology to speed up execution and lower transaction costs, the SEC assumes that operators in this field are primarily selling “securities” that fall under its jurisdiction.

Chairman Gary Gensler, for example, has frequently advocated for cryptocurrency exchanges to register with the SEC, in addition to the SEC’s continuous targeting of potentially fraudulent ICO offerings. Gensler’s stance, which emphasizes investor protection, is that platforms that trade or lend bitcoin are susceptible to SEC regulation. Meanwhile, the SEC has proposed changes to Regulation ATS that appear to broaden the definition of a securities “exchange” to include individuals who develop protocols for decentralized crypto trading.

The SEC sued people and a business promoting a decentralized token product known as DeFi Money Market in its first lawsuit employing DeFi technology. Under the Howey test, the SEC determined that the smart contracts, in that case, qualified as securities subject to regulation since they were marketed as investment contracts.

Coinbase applied to the SEC for permission to operate a stablecoin-based lending scheme, which resulted in the SEC issuing a Wells notice, threatening to sue the business if the program went through. The SEC has also warned at least one cryptocurrency exchange that if it offers a product that allows consumers to earn interest on crypto deposits, it will be sued. Coinbase decided to stop the program’s debut shortly after.

While innovation continues to move at rapid speed, we anticipate the SEC to push harder than ever to catch up, including pursuing individual defendants in the DeFi business and other crypto-adjacent entities.

The recent recovery of DeFi from a tumble in investing

The sector’s recent recovery would have brought about these possibilities and regulation targeting of DeFi following a return of investment and investor trust. According to Messari data, decentralized finance (DeFi) has had a challenging year so far in 2022, with the top ten-ranked DeFi assets down between 10% and 50% since the start of the year. According to figures indicating institutional and retail capital returning to crypto markets, money has started to flow back into the DeFi ecosystem after a month of declines. On February 11, the total value locked on all DeFi platforms for Defi Llama was $211.1 billion, up from $185.14 billion on January 31.