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The State of DeFi Regulation

Cryptocurrency regulation is a crucial topic in today's digital world, and it's important to have trustworthy information about it. Our aim for this article is to provide you with a reliable overview of the areas of the crypto ecosystem that are most in need of regulation, and the possible regulatory frameworks for each. We will also dive into Safe Tokens and highlights the benefits they bring to the table for stablecoins, token issuances, and markets.
As always, we welcome feedback and proposals from regulators, lawmakers, and other decision makers who have extensive experience, perspectives, and authority in market regulation.
Stablecoins, cryptocurrencies backed by stable assets like the US Dollar, are an area in need of a comprehensive regulatory framework. To address the challenges associated with reserve risk, financial crimes, and redemption risk, it is crucial that regulators work together to develop a global, harmonized approach.
  1. Reserve risk: If the reserves of a stablecoin drop below the number of tokens issued, it poses a risk to both consumers and the entire system.
  1. Financial crimes: There should be controls in place to prevent stablecoins from being used to finance illicit activities.
  1. Redemption risk: It is crucial for consumer protection that stablecoin issuers honor their commitment to allow users to redeem their stablecoins for US Dollars.
Safe Tokens can help in this regard by providing yield to users through interest-accruing stablecoins, where the reserves are invested in US Treasuries. Although this changes the characteristics of stablecoins to be more like a security under US standards, this risk can be mitigated by filing an exemption with the SEC, such as Regulation S, and complying with that exemption effectively through the use of Safe Tokens and their ability to restrict trading to a conditional rulest. For example, the stablecoin can ensure that no US traders engage in trading within the first year to comply with Reg S.
For token issuances, we believe that the crypto ecosystem is ready for its next step and that there is a clear need for regulations around the issuance and sale of digital assets to US consumers, especially for tokens that have security-like properties. Over time, major regulatory bodies across US, European, and the rest of the world will publish legilsation that addresses disclosure, audit, oversight, and accountability requirements.
Crypto startups or protocols planning on issuing a token can mitigate risk by issuing a Safe Token, filing Reg S or Reg D with the SEC, and codifying token characteristircs that comply with that filing. Similar to the above example, a project can restrict trading to non-US wallets to comply with Reg S, or check for Accredited Investor status of wallets if they plan to file Reg D. Another important feature is the ability to change rules over time. For instance, Reg S requires non-US traders only for the first year, so the token can be held or treaded by anyone after that timeframe, something Safe Tokens can do as well.
A composable, global regulatory and compliance framework for crypto markets is essential for cross-margining, spot and future integration, standardized reporting, coordinated and integrated surveillance, and regulation and iteration. Both the SEC and CFTC have critical roles to play, and a joint effort between the two agencies would help create a singular regulatory regime.
Since Safe Tokens are ERC20 compatible, they can trade throughout the crypto ecosystem and enforce the same compliance framework and policies. This is customizable by the issuer and any other participants related to the Safe Token, ensuring that the asset can only be traded by KYC/AML counterparties no matter where it trades, on which chain, with any protocol, or as any financial product. This ensures a consistent compliance standard across different platforms and jurisdictions and gives the issuer and holders confidence that they are trading DeFi in a safe and secure way.
Both the SEC and the CFTC play critical roles in markets regulation, and any regime for crypto assets would likely need to be a joint effort. It will need to interface with SEC regulated security registration requirements and with CFTC regulated exchanges and clearinghouses as well. We propose that policy makers leverage the unique expertise of both agencies to create a singular regulatory regime.
We also acknowledge the need for regulations that balance innovation and protection for investors and consumers.
Thank you for reading, and we look forward to your thoughts and comments on these areas of crypto regulation!