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Coinbase's CEO spoke out on Twitter about the SEC's intensions to sue the company if they decide to launch a lending product offering users 4% interest on USDC. Allegedly such product would be considered a security as it involves "the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others".
This is the basis for the Howey test, a framework created in 1946 used to determine whether an asset or contract is a security. Based on such definition, several existing centralized and decentralized services may also be considered securities. SEC chairman Gary Gensler already alerted that decentralized finance (DeFi) may not be immune to SEC oversight.
What's at stake? Currently, around $90 billion is deposited into DeFi on Ethereum, with a large portion of it being driven by profit-seeking motives.
As of September 10 using IntoTheBlock's DeFi Insights
This does not necessarily mean that all DeFi assets are securities nor that they should be regulated as such. The main precedent comes from Ethereum being "decentralized enough" to not be considered as a security.
While it's uncertain exactly what degree of decentralization is the minimum to not be a security, the largest decentralized exchange Uniswap was recently investigated by regulators.
Zooming out - DeFi protocols have been on a path towards decentralization.
- TVL first began to grow exponentially as Compound popularized the concept of yield farming, by compensating users with COMP tokens granting governance rights over the platform.
- DeFi has grown 90x from around $1 billion in TVL since the launch of COMP in June 15, 2020, making it harder for regulators to ignore it.
As of September 10 using IntoTheBlock's DeFi Insights
The amounts of loans outstanding in DeFi also highlight the magnitude that is at stake, with over $20 billion being borrowed from the leading three protocols. If Coinbase Lend were to fit under the definition of a security, these protocols could be implicated if they don't prove to be decentralized enough.
This is likely to lead to further emphasis on decentralization of DeFi. Overall, giving a greater community ownership of these platforms and less reliance on central third parties have been steps taken towards this goal. Ultimately, there are billions at stake incentivizing measures like these and avoiding regulatory issues stifle innovation.
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