Venture Capital (VC) firm Andreessen Horowitz (a16z) and nonprofit research and advocacy organization DeFi Education Fund (DEF) have jointly submitted a key proposal to the Securities and Exchange Commission (SEC) to protect developers and innovation.
A16z, DeFi Group Partner For Crypto Policies
On Wednesday, a16z and the DeFi Education Fund sent a letter to SEC Commissioner Hester Peirce, urging the regulatory agency to exempt decentralized app (dApp) and developers from broker-dealer rules.
The VC firm and the DeFi advocacy group proposed a safe harbor from the broker registration requirements of the Securities Exchange Act of 1934 for trading interfaces that enable users to interact with blockchains and smart contract protocols, including those related to DeFi services and non-fungible token (NFT) marketplaces.
The letter aims to aid the Commission in creating clear rules for determining which Apps fall within the SEC’s jurisdiction, based on specific criteria and consistent with similar safe harbors recently proposed in federal market structure legislation.
DEF’s Executive Directors, Amanda Tuminelli, affirmed that “Developers deserve clarity, and our hope in submitting this proposal is to provide front end developers with clear rules so they can build without worrying they will be subject to unreasonable requirements that are misaligned with the realities of the technology.”
According to the DeFi Education Fund’s blog post, the joint proposal seeks to be flexible enough to account for the “ever-evolving nature” of early-stage tech development, while being grounded in the principle that “most web-based or app-based trading interfaces (…) inherently do not engender the risks that the Exchange Act’s broker-dealer regulatory regime was designed to address.”
“Only those Apps which do not engender the risks that the Exchange Act’s broker-dealer regulatory regime was designed to address should be eligible; in such cases, registration as a broker under the Exchange Act is unwarranted and inappropriate. Conversely, Apps that do pose traditional risks that broker regulations were designed to address should not be able to avail themselves of this safe harbor,” the proposal reads.
Clarity For Developers
As the letter explained, apps must meet four objective criteria to qualify for the safe harbor. First, an app must be non-custodial, never taking control of users’ funds, and it must not exercise discretion over the execution of user transactions. Additionally, the app must not actively solicit or provide investment recommendations and may only passively display neutral market data or functionality.
Lastly, the underlying protocol must be decentralized, either interfacing with protocols that have eliminated operational control or have demonstrated “good faith intention” to decentralize. The proposal also highlighted a limited exception for early-stage protocols under a certain threshold.
According to the letter, this approach would offer three primary benefits, including establishing limits for the application of federal and securities laws to apps that fall within the scope of the proposed safe harbor and safeguarding DeFi developers from being subject to “retroactive application of federal securities laws.”
Additionally, the proposal aligns with the SEC’s historical practices concerning broker registration safe harbors and “is consistent with the historical lack of prohibition on persons engaging in private peer-to-peer securities transactions without the participation of a registered broker, as well as Commissioner Peirce’s recent dictum.”
As reported by Bitcoinist, the SEC Commissioner recently called for the protection of crypto privacy rights and DeFi developments. Peirce asserted that US authorities should welcome privacy-protecting technologies and safeguard individuals’ right to self-custody their digital assets.
We should not ask peers transacting with one another, where no intermediary exists, to collect and report information on each other. Doing so would deputize us to surveil our neighbors—a practice antithetical to a free society. Nor should we require an intermediary to step in the middle of peer-to-peer transactions.
Peirce’s remarks followed the official revocation in July of a controversial crypto rule that would have mandated decentralized exchanges to comply with broker reporting obligations. Notably, the US Department of the Treasury and the Internal Revenue Service (IRS) formally scrapped the regulation, which was set to take full effect in 2027.
The rule, originally proposed in November 2021 through the Infrastructure Investment and Jobs Act, aimed to close the “tax gap” by broadening the definition of “brokers” to include crypto exchanges and other intermediaries, while requiring DeFi platforms to report proceeds from digital asset transactions and detail user transaction information, including names and addresses.
