The SEC Has Some Crypto Complaints

I have been saying for a while that the next front in the fight over crypto regulation is going to be about decentralized-finance (DeFi) lending protocols. The rough idea is:

If you replace the words “smart contract” in that description with the word “person” (or “company,” etc.), you have a classic description of an “investment contract.” Under the “Howey test” of U.S. securities law, an investment contract is “the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others,” which is, straightforwardly, what this is. An investment contract is a type of security, and a security is subject to regulation by the Securities and Exchange Commission. If you sell securities to the public, you generally have to register them with the SEC, deliver a prospectus, have audited financials, etc. Or you can sell them under some exemption from those rules — for instance, if you only sell them to non-U.S. persons, or if you only sell them to “accredited investors” (meaning, roughly, rich people). It seems to me that it would be quite inconvenient for DeFi to be subject to these rules, and that a lot of people in the DeFi world would prefer to be exempt from them, or ignore them.