United states of america Securities and Exchange Commission Commissioner Caroline Crenshaw has highlighted the benefits of decentralized finance (DeFi) while warning of the dangers of failing to embrace a protective regulatory framework in a Tuesday opinion slice.

The article, "DeFi Risks, Regulations, and Opportunities," is the first in the countdown issue of "The International Journal of Blockchain Law." In it, Crenshaw outlines her belief that the DeFi customs must address issues with transparency and pseudonymity while coming into compliance with SEC rules:

"In the dauntless new DeFi world, to date in that location has not been broad adoption of regulatory frameworks that deliver important protections in other markets."

Regarding what she sees as a lack of transparency, Crenshaw said DeFi lacks marketplace protections, which "contributes to a 2 tier marketplace in which professional investors and insiders reap outsized returns."

Although the code for well-nigh DeFi projects is open-source and all transactions are recorded on-chain, she argues that retail investors are at a disadvantage to professional investors, who take the resource to perform audits on lawmaking and evolution teams.

In her view, "It is not reasonable to build a financial organisation that demands investors likewise be sophisticated interpreters of circuitous lawmaking."

Crenshaw also highlighted concerns about the link between pseudonymity and market manipulation. When market participants operate pseudonymously, she argued that information technology becomes difficult to rails and mitigate manipulation through the use of bots and collusive trading. She said that investors tend to be most vulnerable to losses every bit a result of market manipulation since normal signals, such as trading volumes and momentum, become unreliable.

Furthermore, she believes that DeFi projects should be in open discussions with the SEC to find solutions to the dilemma of resolving how pseudonymity tin can comply with existing rules.

The DeFi infinite has historically touted the ability to remain pseudonymous as a feature, rather than a burden on participants. Crenshaw, however, doesn't believe investors prioritize information technology over making money:

"In moving to DeFi, I suspect most retail investors are not doing then because they seek greater privacy; they are seeking ameliorate returns than they believe they tin can find from other investments."

In an Oct. 12 speech at the SEC Speaks briefing, Crenshaw suggested that existing regulatory frameworks, such every bit gatekeeping functions in other markets, are sufficient in protecting investors in the digital market infinite.

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While Crenshaw's electric current criticisms of DeFi practice not quite repeat the bellicose sentiments from Senator Elizabeth Warren and former Commodity Futures Trading Commissioner Dan Berkovitz, they are less favorable than the approach of SEC Commissioner Hester Peirce, who supports a prophylactic harbor law that would grant network developers a 3-year grace period to build a decentralized network.