The DeFi Schooling Fund (DEF) submitted a letter to the Securities and Alternate Fee (SEC) on April 18 proposing 5 core ideas for making a “token protected harbor” framework to assist decentralized finance initiatives whereas broader regulatory laws is pending.
The suggestions goal to assist the SEC construction a time-limited exemption for token initiatives growing towards decentralization, providing a regulatory setting that facilitates disclosure with out prematurely classifying property as securities.
Know-how-agnostic regulation
The DEF emphasised that any protected harbor ought to undertake a technology-agnostic strategy. The framework ought to tackle the dangers of actions moderately than prescribing guidelines for particular blockchain fashions or technical implementations.
The letter warned in opposition to entrenching explicit applied sciences, stating that it might stifle innovation if the SEC inadvertently favors particular consensus mechanisms or architectural designs.
Concerning eligibility, DEF argued that the protected harbor needs to be open to a variety of initiatives that intend to decentralize. Somewhat than evaluating a token’s standing solely at its genesis, the SEC ought to permit already-distributed tokens to qualify, offered they meet decentralization objectives.
It argued that broad eligibility standards are mandatory to make sure the inclusion of initiatives launched earlier than establishing a transparent regulatory framework for future compliance pathways.
Concerning disclosure necessities, the DEF advocated for fastidiously calibrated obligations that stability materials info wants with the realities confronted by early-stage improvement groups.
The group advised disclosures targeted on supply code transparency, token economics, governance buildings, staff and insider actions, cybersecurity audits, and improvement roadmaps.
The DEF additionally proposed periodic disclosures all through the protected harbor interval, with consideration given to streamlining compliance via API connectivity and blockchain automation. Further compliance measures, equivalent to lock-up intervals for insiders, might assist align incentives towards decentralization with out overburdening initiatives.
Clear exit standards
The letter pressured the significance of creating a transparent “Exit Check” that defines when a venture has sufficiently decentralized to not be thought of a safety below US regulation.
Key standards for passing the Exit Check would come with most transparency, permissionless participation, person custody of property, lack of centralized management, totally automated transaction processes, and the absence of retained financial authority by any single group.
The DEF advisable a practical timeframe for initiatives to fulfill these benchmarks, equivalent to three to 4 years. Initiatives that fail to fulfill the factors throughout the preliminary window can apply for an prolonged protected harbor interval, offered they show good religion efforts to decentralize.
A crucial element of the DEF’s proposal concerned protections for secondary market contributors.
Whereas a token stays throughout the protected harbor, intermediaries supporting its buying and selling, equivalent to digital asset exchanges and market makers, shouldn’t be required to register as broker-dealers or securities exchanges.
Complete framework wanted
The DEF famous that exempting infrastructure suppliers from conventional securities laws would cut back authorized uncertainty and foster broader participation in decentralized markets.
Whereas supporting the creation of a token protected harbor, the DEF in the end referred to as for Congress to develop a complete legislative framework for digital property.
The group expressed that sturdy authorized readability should come from statute moderately than momentary regulatory carve-outs. Nonetheless, a well-structured protected harbor might defend buyers and builders whereas the longer lawmaking course of unfolds.
The DEF concluded its letter by committing to ongoing engagement with the SEC and the broader crypto group. The group additionally indicated that it will be publishing its suggestions publicly to solicit additional suggestions.
