Polygon Labs Accuses SEC of Trying to Kill Off DeFi in US

The U.S. Securities and Exchange Commission (SEC) plans to amend 89-year-old legislation to include decentralized finance ‘exchanges’ (DEXs). Polygon is among several DeFi platforms objecting to this broad and harmful terminology that doesn’t even apply to decentralized blockchains.

On June 13, Polygon Labs, which unveiled protocol version 2 this week, submitted a response to the SEC’s proposed rulemaking redefining the term “exchange.”

DeFi Under Threat: Polygon

Polygon chief policy officer, Rebecca Rettig, said the new proposal threatens the existence of decentralized blockchains.

“The new proposed rule isn’t only harmful for DeFi – it threatens the very existence of permissionless blockchain networks in the U.S.”

However, it appears that Gary Gensler and his team are actively trying to kill off DeFi in America.

In March 2022, the SEC proposed plans to revise the 1934 Securities Exchange Act. The regulator wants to include DeFi and DEXs because the term contains the word “exchange.”

By its mandate, DeFi platforms and DEXs should be treated the same as securities or stock exchanges.

In its 17-page response, Polygon clarified that network validators “cannot be considered a “group of persons” in the way the proposal suggests.”

The SEC believes “exchanges” are controlled by people, but this is clearly not the case for many DEXs governed by algorithms and smart contracts.

Rettig added:

“Numerous disparate & independent validators cannot somehow coordinate to “come in and register” as an “exchange” – from a technological, legal or practical perspective.”

It went to great lengths to explain and “educate” the SEC on how decentralized ledgers actually operate. This is vastly different from stock exchanges. Rettig continued to state that the SEC was effectively trying to ban DeFi and all permissionless networks from the United States:  

“Ultimately, as set forth more fully in our response, the proposed amended rule would be a de facto ban on all permissionless blockchain networks in the U.S., as well as much of the software protocols built on top of such networks, including DeFi protocols.”

Paradigm Joins the Fight

Venture capital firm Paradigm also filed a response to the SEC on the same issue on June 9.

At the time, Paradigm legal counsel, Rodrigo Seira, commented:

“Through this haphazard rulemaking, the SEC inappropriately attempts to bring crypto trading platforms, including DEXs, under its remit and regulate them as securities exchanges.”

Moreover, prominent investors such as Mark Cuban have also joined the fight. The billionaire asserted that it was in the interest of SEC lawyers to prioritize legal action over compliance assistance.

Furthermore, on June 12, policymakers Senator Warren Davidson and House Majority Whip Tom Emmer filed a new bill. It aims to oust “tyrannical chairman” Gary Gensler and reform the SEC.