Crypto Mom: True decentralization is the only thing that will save DeFi projects

Hester Peirce — colloquially known as “Crypto Mom” — of the United States Securities and Exchange Commission has warned of rampant “shadow-centralization” within the decentralized finance (DeFi) sector.

Speaking to outspoken DeFiWatch founder Chris Blec in a Wednesday discussion streamed by The Defiant, the SEC commissioner noted that decentralized organizations and DeFi are new concepts for regulators and that “having a peer-to-peer system that doesn’t have central intermediaries is very different from what we’re normally dealing with.”

“If you want to be decentralized, you really need to be decentralized, and that is going to then put you in a different category from the perspective of regulators because that’s just not something that we’ve dealt with before.”

“If regulators can find a centralized part or group of people that they can grab hold of, they will grab hold of them. So, I think it’s just good to be cautious about how you build things because, down the road, it could have regulatory implications,” she added.

Blec asked for Peirce’s opinion on the best route for developing decentralized protocols, asking if founders should strive to reach the same level of decentralization as Bitcoin, or start to build “really cautiously and then running towards regulation” to avoid running afoul of the law.

The commissioner said that existing regulations have been designed so that “any entity or person that is involved in the financial industry is probably going to come under at least one regulatory framework.”

Peirce urged DeFi founders who believe they are engaged in new activities that do not fall under the framework of existing legislation to engage regulators and “figure out if there’s an alternative way [...] to comply.”

“If you want to make a case that you’re something different than the CeFi or TradFi system, then you have to show that you’re doing something radically different, which, from my perspective, requires decentralization.”

“If the trust is really coming from the code, that’s something very different than if the trust is coming from one company or a group of people,” she added.

The commissioner also noted the prevalence of “shadow-centralization” within the DeFi sector, where opaque governance structures can lead to a protocol being subject to centralized control despite wearing the banner of decentralization in its marketing.

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However, Peirce urged regulators to adapt to decentralized innovation, stating, “Regulators need to do a better job of figuring out how to work with innovators.”

“That’s part of the reason our financial system is so concentrated,” she continued. “Because the only people who can afford to wait to get the approvals are people who have a lot of money already and who can have really good lawyers already.”

On the question of what Satoshi Nakamoto’s experience would look like should they have engaged the SEC before launching Bitcoin, Peirce stated:

“It’s 2021 — It would be very likely that Satoshi would still be [...] trying to get a no-action letter.”