The DeFi Education Fund (DEF) has put forward a creative, ambitious, and precedent-setting framework to the Securities and Exchange Commission (SEC). This effort aims to foster safe and responsible innovation in the DeFi ecosystem. On April 18, the DEF intervention filed its comment letter on the SEC. In it, they described five guiding principles for drafting a “token safe harbor.” This framework aims to fill the gaps to promote DeFi projects while waiting for more comprehensive regulatory Congressional legislation.
The proposed safe harbor suggests the SEC structure a time-limited exemption for token projects actively developing towards decentralization. Such an exemption would provide a regulatory safe harbor that provides the disclosures that are most important without the need to preemptively classify assets as securities. The DEF’s new initiative is a smart, forward-looking approach to finding that balance between innovation and investor protection. It boldly tackles the fast-changing digital asset landscape.
Core Principles of the Proposed Framework
The DEF’s letter reinforces the need for a technology-neutral approach to the safe harbor, so that it can continue to adapt to new technological advancements. The proposal urges that the safe harbor be made available to the most diverse range of projects. These projects need to have a clear demonstrable plan to move towards decentralization. By adopting a more inclusive approach, this guide seeks to facilitate greater, more productive participation and innovation within the DeFi ecosystem.
Additionally, the DEF proposes that tokens already distributed should be eligible for the safe harbor if they sufficiently achieve certain decentralization objectives. This provision acknowledges the current landscape of the crypto market and aims to provide a pathway for existing projects to achieve regulatory compliance.
The Exit Test: Defining Decentralization
Perhaps the most interesting part of the DEF’s proposal is the creation of an “Exit Test.” This test would define when a project has sufficiently decentralized to no longer be considered a security under US law. Each project’s Exit Test includes a set of fundamental criteria specifically crafted to indicate how well a project has furthered the goal of decentralization.
These criteria demand maximum transparency, permissionless participation, custody of user assets, and no centralized intermediary. The Exit Test calls for fully automated transaction processes and prohibits maintained economic control by any one entity. By fulfilling these benchmarks, projects can show their efforts towards decentralization and have a stronger argument for not being classified as securities.
Realistic Timeframe and Ongoing Engagement
The DEF recognizes the difficulty of fully realizing decentralization. As such, it suggests the need for more time, an achievable period, for projects to reach Exit Test standards. They recommend a duration of three to four years. This 90-day period provides federally funded projects with sufficient lead time to make required modifications and publicly demonstrate compliance.
Beyond the shape of the rule itself, the DEF has pledged to continue engaging with the SEC and all members of the crypto ecosystem. This renewed commitment speaks to their desire to cultivate a collaborative environment and support robust implementation of the proposed framework.
