If It Quacks Like a Duck... SEC Chairman Gary Gensler Invokes the "Spirit of the Law" as DeFi Takes Center Stage

SEC Chairman Gary Gensler vowed on November 4, 2021, that the SEC will look beyond the label of decentralized finance (DeFi) or peer-to-peer lending products and consider the “economic realities” of a given product or arrangement. 

Chairman Gensler further warned that "[h]istory tells us that when a group of people try to mask the underlying economic realities of a certain product or instrument, investors can get hurt. Further, their pain can spread from the financial system to the real economy." 

Chairman Gensler's remarks come as DeFi has come under intensifying regulatory scrutiny in recent months, adding to the growing library of warning signals and soundbites from regulators and legislators.

In August, the SEC charged two Florida men and their Cayman Islands company (d/b/a Blockchain Credit Partners) for the unregistered sales of securities using smart contracts and "so-called" DeFi technology in what the agency described as the agency's "first involving securities using DeFi technology."

In September, it was reported the SEC was investigating a prominent DeFi platform as enforcement attorneys reportedly sought information about how the platform was used and marketed.

In October, the Financial Action Task Force (FATF), an independent inter-governmental body that develops and promotes policies to protect the global financial systems from money laundering, issued a report warning that material influencers or controllers of DeFi application should be subject to anti-money laundering (AML) and controlling the financing of terrorisms (CFT) obligations.

In November, the President's Working Group (PWG) published a report on stablecoins, which echoed similar concerns, noting that "despite claims of decentralization, operations and activities within DeFi are highly concentrated in and, governed or administered by, a small group of developers and/or investors. Despite some asserted distinctions from more traditional or centralized financial products, services, and activities, DeFi arrangements ... raise similar investor and consumer protection, market integrity, and policy concerns."