Here is why DeFi will get sued.

George Salapa
4 min readSep 5, 2021

There is this invisible battle taking place between the U.S. regulator and the (so far still but now less) crazy unregulated crypto world. Generally, the crypto people would be like “look man, none of this are securities, it is different, it runs on blockchain by itself,” while the SEC is quiet and then with a 3 year delay, it charges them for something that makes everyone in the crypto world uneasy because they’ve already moved onto something that is even worse.

In 2017, initial coin offerings were very exciting and for a while it was assumed that if you do an IPO with a token you’re fine because, hey, it’s crypto. That was, of course, wrong and now SEC has a whole section devoted to how wrong that was and it has brought down a lot of enforcement actions against ICO issuers for doing unregistered securities sales.

It didn’t stop there, though, because, naturally, if (some of the) ICO tokens were securities then places where they could be traded were security exchanges, and you need a license for that. And so, this month (mind you after 4 years), the SEC has charged one of the exchanges for doing just that, operating an unregistered security exchange:

The SEC’s order finds that from July 2017 through November 2019, […], Poloniex operated a web-based trading platform that facilitated buying and selling digital assets, including digital assets that were investment contracts and therefore securities.

And I mean this is not only bad news for the crypto exchanges, many of which allowed trading in tokens-that-were-really-securities in the past; it could be bad news for DeFi as well. We chat here often about decentralized finance (DeFi):

To put it simply, DeFi is rewriting financial infrastructure into code on blockchain with no human involvement or control whatsoever. So, convert your fiat to cryptocurrency and you suddenly emerge in a world where you can use your crypto to perform large number of functions that are traditionally performed by the traditional financial infrastructure, but in a completely humanless way, i.e. by sending your crypto to smart contracts, which are themselves just lines of code on blockchain with certain rules embedded.

You can see where the crypto crowd’s “not securities, runs on blockchain by itself” argument comes in…

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George Salapa

Founder finstora. Thoughts on money & culture. Some poetry. Mostly recycled literature. Wrote for Forbes and Venturebeat before.