The middle ground. How decentralized crypto exchanges depend on the SEC
A wave of crackdowns by U.S. exchange regulators is affecting the companies behind the development of decentralized trading platforms
Cryptocurrency exchange dYdX, one of the most popular DeFi trading platforms, is on its way to becoming a fully decentralized project, and the policies of U.S. authorities play a part. It's currently running on a hybrid decentralized model, but developers plan to launch a new version in September. This should help reduce the influence of centralized structures, on which it still has to rely.
The exchange depends at least on the dYdX Trading behind its development and StarkWare's solutions for scaling trading capabilities on the Ethereum network. The new version of dYdX will run on the Cosmos blockchain and leverage its own protocols to minimize reliance on centralized links, any of which could potentially be pressured by regulators.
"Penalties will definitely continue": what else will the SEC punish the crypto market for
Decentralized finance (DeFi) projects are characterized by the absence of intermediaries for trading or borrowing transactions in crypto-assets. An automated protocol, the smart contract, plays the role of an intermediary. However, as in the case of dYdX, the development of this protocol is the responsibility of a specific company and team of developers.
After Gary Gensler, head of the U.S. Securities and Exchange Commission (SEC), said that almost all existing crypto-assets are treated as securities by the agency, any token issuer potentially falls under the agency's oversight.
"Reprisals of epic proportions."
Speaking to community members during a March 30 conference call, Jared Gray, head of another decentralized exchange, SushiSwap, shared that he "stopped getting inspired" by his work. Gray was candid about his attitude towards American regulators, specifically mentioning Senator Elizabeth Warren's campaign agenda, part of which is a complete ban on cryptocurrency transactions in the United States. Politico published an article about Warren, saying in the headline that she was "raising an army against cryptocurrencies.
The week before, Gray revealed that he had received a subpoena from the SEC regarding his involvement with SushiSwap. To fund the upcoming lawsuit, Gray tabled a proposal for the exchange's existing decentralized autonomous organization (DAO) to set aside $4 million from the Minute's coffers to create a "Sushi DAO Legal Defense Fund."
"We're talking about an onslaught and retaliation of epic proportions, and it's only going to get worse," warned former SEC official John Reed Stark in a commentary for Bloomberg. Stark served as a senior adviser to the agency and headed its Internet enforcement offices. He observed that regulators initially left market leaders untouched, focusing on easy-to-access projects. But now they're targeting the big players as well.
Earlier this year, the SEC sued the cryptocurrency exchange Gemini over its Earn program, which allowed users of the site to earn interest from lending their tokens. The agency then fined the Kraken exchange $30 million, equating its stacking service to making money from unregistered securities. Later, the agency banned Paxos from issuing BUSD tokens, which at the time was considered the official stack coin of the Binance exchange and was second only to USDC from Tether and USDC from Circle in terms of capitalization.
Binance itself faced a lawsuit from the Commodity Futures Trading Commission (CFTC). The agency accuses the largest cryptocurrency exchange of facilitating illegal activities and trade manipulation.
In late March, the SEC accused Tron blockchain founder and Huobi exchange co-owner Justin Sun of artificially inflating trading volumes on the exchange. Just the same day, Coinbase received a notice from the SEC threatening to sue over a number of tokens and financial products available on the platform.
Decentralized exchanges are already surpassing Coinbase in terms of the trading volume. Uniswap had a figure of $71.6 billion in March, according to The Block Research. That's 45% higher than Coinbase's $49.4 billion in the same month. Among traditional crypto exchanges, Coinbase is second only to Binance in terms of turnover.
Summing up the first quarter of this year, Coinbase representatives wrote that trends on the exchange reflect the broader market. The actions of the SEC and CFTC only underscore the uncertainty surrounding Ethereum and other altcoins, the publication said.
His company, dYdX Trading, will continue to work on the protocol after the launch of the new version of the exchange. The project employs about 50 people, and they are paid from funds received from investors and exchange trading commissions.