The new SEC chairman has issued multiple "get out of jail free cards"; is another spring for DeFi coming?

Original | Odaily Daily Report (@OdailyChina)

Author｜Azuma (@azuma_eth)

Last night, the U.S. Securities and Exchange Commission (SEC) held a roundtable meeting themed “DeFi and the American Spirit.”

Before this meeting, the SEC had held four roundtable discussions on cryptocurrency, but perhaps due to the onboarding progress of the new SEC Chair Paul Atkins, not much concrete and clear policy guidance content had leaked from the previous meetings.

• Odaily Note: Paul Atkins officially took office on April 22, and shortly delivered a brief opening speech at the third meeting (just 4 days after taking office). At the fourth meeting, he gave a lengthy speech on cryptocurrency for the first time as SEC Chairman (see “What Signals Were Revealed in the New SEC Chairman’s First Crypto-Themed Speech?”). However, this speech only provided an overall overview of his work plan as SEC Chairman and did not elaborate much on regulatory issues concerning specific sub-sectors.

But last night’s meeting was completely different. Paul Atkins dropped several bombshells during his speech, almost issuing a series of “get out of jail free cards” to DeFi in the form of stacked BUFF.

Due to this favorable impact, the DeFi sector has also experienced a long-awaited violent surge. As of today at 11:20, the performance of mainstream DeFi tokens is as follows:

• AAVE is currently priced at 289.15 USDT, with a 24-hour increase of 15.54%;
• UNI is currently priced at 7.045 USDT, with a 24-hour increase of 12.85%;
• HYPE is currently reported at 39.15 USDT, with a 24-hour increase of 11.2%;
• PENDLE is currently priced at 4.355 USDT, with a 24-hour increase of 14.2%;
• MKR is currently priced at 1980 USDT, with a 24-hour increase of 13.66%;

Full Text of Paul Atkins’ Speech

Thank you all, good afternoon. It is a great honor to gather with you today. First, I would like to thank Commissioner Peirce and the cryptocurrency working group for organizing this event, and I also appreciate the participation of Commissioner Crenshaw and Commissioner Uyeda. Of course, I would like to especially thank the roundtable guests and host Troy Parades for their generous contribution of time and wisdom to this discussion.

Today’s roundtable discussion theme is “DeFi and the American Spirit.” This title is aptly chosen, because the core American values of economic freedom, private property rights, and innovation are the inherent genes of the decentralized finance (DeFi) movement.

Blockchain is undoubtedly a highly creative and potentially revolutionary innovation that prompts us to rethink the ownership and transfer of proof of intellectual property and economic property rights. As a shared database, blockchain allows people to own digital assets known as cryptocurrencies without relying on intermediaries. These peer-to-peer networks encourage participants to verify and maintain the database according to network rules through economic incentive mechanisms. This is a true free market system — users pay network participants service fees based on demand, incorporating their transactions into the limited storage capacity of so-called “blocks.”

The previous U.S. government claimed through lawsuits, speeches, regulations, and regulatory threats that participants and staking service providers might be involved in securities trading, thereby hindering Americans’ participation in these market-based systems. I am grateful to my colleagues in the corporate finance department for clarifying their position: Voluntarily participating as a “miner,” “validator,” or “staking service provider” in proof-of-work (PoW) or proof-of-stake (PoS) networks is not within the jurisdiction of federal securities law. Although I am pleased with this progress, it is still not a formally enacted rule with legal effect, so we must continue to work hard. The Securities and Exchange Commission must establish corresponding regulations based on the powers granted by Congress.

Another core feature of blockchain technology is allowing individuals to self-custody their crypto assets through digital wallets. The autonomy of private property custody is a fundamental American value that should not disappear simply because one is logged onto the internet. I support granting market participants greater flexibility in self-custodying crypto assets, especially in cases where intermediaries would introduce unnecessary transaction costs or restrict activities such as on-chain staking.

The previous government claimed through regulatory actions that developers of on-chain technologies such as self-custody digital wallets might be engaging in brokerage activities, which severely undermined relevant innovations. It is unreasonable for engineers to be bound by federal securities laws merely for releasing such software code. As stated in a certain court ruling (here quoting the original text of the judgment): “It is absurd to hold autonomous vehicle developers liable for third-party violations of traffic regulations or bank robbery. In such cases, people do not sue the car companies for aiding in the crime, but rather the individuals committing the crime.”

Many entrepreneurs are developing software applications that do not require operator management. This type of self-executing code, which is available to everyone, controlled by no one, and supports private peer-to-peer transactions, may sound like science fiction. But blockchain technology has indeed spawned a new class of software that can achieve these functions without intermediaries. We should not let a century-old regulatory framework stifle what could be disruptive — more importantly, improve and advance — the technological innovations of the current traditional intermediary model. We need not fear the future that automatically arises.

It has been proven that these on-chain self-executing software systems exhibit strong resilience during crises. While centralized platforms have shaken and collapsed under recent pressures, many on-chain systems continue to run according to the design of their open-source code.

Current securities regulations are mainly based on the oversight of issuers and intermediaries (such as broker-dealers, advisors, exchanges, and clearinghouses). The rulemakers at that time may not have envisioned that self-executing code would replace these entities. I have asked the committee staff to study whether further guidance or legislation is needed for registered entities to legally and compliantly trade with these software systems.

I am equally looking forward to issuers and intermediaries using on-chain software systems to eliminate economic friction, improve capital efficiency, innovate financial products, and enhance liquidity. Current securities regulations have taken into account the use of new technologies by issuers and intermediaries, but I still urge the staff to assess whether there is a need to revise the committee’s regulations in order to better support those operating on-chain financial systems.

During the period when the committee and its staff are formulating regulatory rules suitable for the on-chain financial market, I have instructed the staff to consider establishing a conditional exemption framework or “innovation exemption” mechanism to allow registered and non-registered entities to quickly launch on-chain products and services. By encouraging developers, entrepreneurs, and other businesses willing to comply with specific conditions to innovate on-chain technology in the United States, this exemption mechanism helps to realize President Trump’s vision of making the United States the “global cryptocurrency capital.”

Thank you all for listening, and I look forward to the upcoming discussion.

Detailed Analysis

“Economic freedom, private property rights, and innovation are the inherent genes of the decentralized finance (DeFi) movement, which are core American values.”

This sentence is a concise summary, directly elevating the importance of DeFi, emphasizing that the development of DeFi aligns with the core values of the United States.

Voluntarily participating as a “miner”, “validator”, or “staking service provider” in proof-of-work (PoW) or proof-of-stake networks (PoS) is not subject to federal securities laws.

This can be said to be the first “get out of jail free card,” benefiting a host of projects in the upstream and downstream of mining and staking services, and indirectly helping to stabilize all PoW and PoS networks.

The previous SEC, led by Gary Gensler, has taken action against the staking sector multiple times, such as specifically naming Lido and Rocket Pool’s liquid staking derivative tokens stETH and rETH as unregistered securities. Paul Atkins’ statement clearly indicates that the SEC will no longer trouble these projects for securities violations.

I support giving market participants more flexibility in self-custody of crypto assets, especially in situations where intermediaries may impose unnecessary transaction costs or restrict activities like on-chain staking… The previous government claimed through regulatory actions that developers of on-chain technologies such as self-custody digital wallets might be engaging in brokerage activities, which severely harmed related innovations…

This is another correction to the situation where innovation in the self-custody field is hindered under the excessive regulation of the previous SEC.

Paul Atkins uses the metaphor “automakers should not be held accountable for third parties hijacking cars” to emphasize that the development of on-chain technologies such as self-custody digital wallets should not be conflated with financial brokerage institutions; therefore, developers should not be subject to federal securities laws simply for releasing such software code.

This inevitably brings to mind the highly controversial case of the TornadoCash developers from back in the day…

The current securities regulations are mainly based on the supervision of issuers and intermediaries (such as brokerage firms, advisors, exchanges, and clearing agencies). The rulemakers at the time may not have envisioned that self-executing code would replace these entities.

I personally think this sentence is very critical, because it indicates that Paul Atkins has clearly realized the essential difference between on-chain financial products and traditional financial services —— automation of services relying on code, which may represent a different perspective that the SEC will take in evaluating on-chain financial issues in the future.

During the period when the committee and its staff are formulating regulatory rules suitable for the on-chain financial market, I have instructed the staff to consider establishing a conditional exemption framework or an “innovation exemption” mechanism, allowing both registered and non-registered entities to quickly launch on-chain products and services.

This is undoubtedly the most significant sentence in the entire text —— it will provide clear legal guidance for the launch and operation of DeFi projects during the finalization of the new rules, and can be seen as a relaxation of regulation for the entire DeFi industry.

Paul Atkins has previously emphasized the hope of transforming the SEC’s approach from the previous administration’s “punishment after the fact” to “guidance before the fact,” which is the specific strategy he has provided.

In summary, from the perspective of the entire DeFi sector, last night’s roundtable meeting can almost be regarded as a milestone event, representing that the SEC has finally provided concrete and clear regulatory guidelines for this niche sector. For DeFi, which has long been seen as the most vibrant area of the industry but has suffered from regulatory suppression, this may mark the beginning of another spring.