Apr. 16, 2023
April 16, 2023 I write to express my concerns regarding the potential regulation of decentralized finance (DeFi) platforms under Exchange Act Rule 3b-16, which defines the term \"exchange.\" DeFi platforms have been rapidly growing, and their innovative nature has brought significant benefits to the global financial system. I believe that DeFi platforms should not be regulated under Rule 3b-16 for the following reasons: Decentralization and Autonomous Nature: DeFi platforms operate on a decentralized basis, without any central authority or intermediaries. They are primarily governed by smart contracts that run autonomously on blockchain networks. Regulating DeFi platforms under Rule 3b-16 would not only impede technological innovation but also be inconsistent with the underlying nature of the technology. Community Governance: DeFi platforms are often governed by their respective communities through a decentralized consensus mechanism. Token holders can propose changes and vote on platform upgrades, making DeFi platforms self-regulating ecosystems. Applying traditional regulations to such a system may lead to conflicts with the community-driven nature of these platforms. Technological Neutrality: Rule 3b-16 was formulated before the advent of blockchain technology and DeFi platforms. Imposing this rule on DeFi may result in unintended consequences and hinder technological progress. Instead, regulations should be tailored specifically to the unique nature of DeFi to ensure its continued growth and development. Global Nature of DeFi: DeFi platforms operate on a global scale, with users from various jurisdictions participating in their ecosystems. Regulating DeFi platforms under Rule 3b-16 could create a fragmented regulatory landscape, leading to inefficiencies and hindering cross-border transactions. A more harmonized, global approach to DeFi regulation would be beneficial to both the industry and its users. Innovation and Financial Inclusion: DeFi platforms offer innovative financial products and services that can enhance financial inclusion, promote competition, and foster economic growth. Overregulation of DeFi may stifle innovation, limit access to financial services for underserved populations, and hinder the potential benefits of this technology. In light of the above reasons, I urge the SEC to carefully consider the unique characteristics of DeFi platforms and avoid applying Rule 3b-16 to them. Instead, I recommend the development of a tailored regulatory framework that encourages innovation, protects consumers, and fosters the growth of the DeFi industry.