SEC Commissioner Tackles DeFi Transparency

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  • An SEC commissioner has stated that retail investors aren’t being given the full picture on DeFi projects
  • Caroline Crenshaw said in an opinion piece that institutional investors had access to much more information when it comes to DeFi investments
  • Retail investors don’t have the same resources, meaning they cannot make as informed decisions

Securities and Exchange Commission (SEC) commissioner Caroline Crenshaw has questioned how fair the DeFi market is to retail participants as part of a longform piece on the positives and negatives of the sector. In the inaugural issue of The International Journal of Blockchain Law, Crenshaw tackles the DeFi question in an opinion piece called DeFi Risks, Regulations, and Opportunities in which she questions the transparency of the space and explains how retail investors get a raw deal compared to institutional investors as well as questioning whether the DeFi sector has the desire and the ability to tackle what she calls a transparency issue.

SEC Job to Demand “Equal Access” of Info for All Investors

Crenshaw begins by clarifying the SEC’s role in movements such as cryptocurrency and DeFi:

…it is not the SEC’s role to prevent all investment losses. It is also not my goal to restrict investor access to fair and appropriate opportunities. But it is my job to demand that investors have equal access to critical information so they can make informed decisions whether to invest and at what price.

Crenshaw says she believes that this isn’t happening in the DeFi space, with venture capital firms still funding many DeFi projects at source and reaping huge benefits compared to later retail entrants. These benefits aren’t just financial she says, but are in fact more comprehensive:

The underlying funding deals often grant professional investors equity, options, advisory roles, access to project team management, formal or informal say on governance and operations, anti-dilution rights, and the ability to distribute controlling interests to allies, among other benefits. Rarely are these arrangements disclosed, but they can have a significant impact on investment values and outcomes.

Retail DeFi Investors at Disadvantage

Crenshaw adds that retail investors are “already operating at a significant disadvantage to professional investors in DeFi” and that “this information imbalance exacerbates the problem.” Retail investors also lack the knowledge and resources to evaluate a project’s code, says Crenshaw, which puts them at a further disadvantage when it comes to fundamental analysis.

This information gap and transparency problem needs to be addressed, she concludes, or retail investors will continue to lose out as the new paradigm sweeps through the financial markets.