DeFi needs to address transparency and pseudonyms

In a November 9 statement, SEC Commissioner Caroline Crenshaw highlighted the benefits of decentralized funding while warning of the dangers of not adopting a protective regulatory framework.

Contributions, DeFi Risks, Regulations, and Opportunities, is the first edition of the first edition of the “International Journal of Blockchain Law”. In it, Crenshaw explains her belief that the DeFi community must solve problems with transparency and pseudonyms while complying with SEC rules:

“In the brave new world of DeFi, there hasn’t been a widespread adoption of regulatory frameworks that offer significant protection in other markets.”

On what she sees as a lack of transparency, Crenshaw said the DeFi lacks market protection, which “contributes to a two-tier market where professional investors and insiders make superior profits.”

Although the code of most DeFi projects is open source and all transactions in the chain are recorded, she believes that retail investors are at a disadvantage compared to professional investors who have the resources to conduct a review of the code and the development team.

In their view, there is no point in building a financial system that requires investors to be complex interpreters of complex code.

Crenshaw also raised concerns about the link between aliases and market manipulation. When market participants act in disguise, it is difficult to track and minimize manipulation by bots and collusive trading. She said investors are most vulnerable to losses from market manipulation as normal signals like trading volume and momentum become unreliable.

In addition, she believes that DeFi projects should be openly discussed with the SEC in order to find a solution to the dilemma of how pseudonyms can conform to the existing rules.

In the past, the DeFi room has promoted the possibility of keeping pseudonyms as a feature and not as a burden for the participants. However, Crenshaw doesn’t believe that investors prioritize making money:

“I suspect most retail investors will not switch to DeFi because they are looking for more privacy. They are looking for better returns than they think they will find from other investments. ”

In a speech on October 12 at the SEC Speaks conference, Crenshaw suggested that existing regulatory frameworks, such as watchdog functions in other markets, are sufficient to protect investors in the digital market space.

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While Crenshaw’s current criticism of DeFi doesn’t quite align with the views of Senator Elizabeth Warren and former Commodity Futures Commissioner Dan Berkovitz, they are less favorable than his approach by SEC Commissioner Hester Pierce, who advocates a safe harbor law, This gives network developers a three-year grace period to set up a decentralized network.