DeFi Investing Becoming a Case of Regulatory Dodgeball

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  • Investing in DeFi projects has become a much riskier prospect recently
  • Both state and federal regulators have threatened DeFi projects with cease and desist orders
  • Holding tokens for DeFi platforms could see holders involved in a game of regulatory dodgeball

Ever since the DeFi boom of 2019 there has been an undercurrent of concern in some quarters that the promise of a completely decentralized financial system is a dream that would never be allowed to flourish. This has proved to be the case with both state and federal regulators targeting DeFi projects they deem to be flouting securities rules, leaving holders of the tokens of those platforms playing a kind of regulatory dodgeball that they hope will not hit them. The odds, however, are not looking good.

DeFi Dream Will Not be Allowed to Flourish

DeFi was always going to be a sector that regulators would target sooner or later – as we saw with Facebook’s Libra disaster, governments do not like private financial ecosystems. The claim, of course, is that they want to protect citizens, whereas the truth is that they don’t like financial systems that are outside of their control.

We have seen this most recently with lending platforms BlockFi and Celsius, and to a lesser extent Coinbase. BlockFi and Celsius have been targeted by the same state regulators within weeks of each other for operating what they determine to be an offer of illegal securities. Why those two projects of all those in the DeFi space were chosen isn’t clear, but it reinforces the notion that any DeFi project is at risk of enforcement action.

Coinbase meanwhile was targeted by the Securities and Exchange Commission (SEC) for the same reasons in relation to their now shuttered Coinbase Lend program after complaining that the SEC refused to engage with them at the planning stage.

Tokenholders May Bear the Brunt of Consumer ‘Protection’

With SEC chair Gary Gensler making it clear since his appointment in January that he would be targeting the DeFi sector, and not, seemingly, in a constructive way, tokenholders of these projects have unwittingly entered this game of regulatory dodgeball, and their portfolios might be the ones taking the hit.

This is of course highly ironic given that regulators claim to be on the side of investors and want to protect them, which they are clearly not doing by hammering DeFi projects instead of working with them