WASHINGTON, D.C. — March 15, 2025 — The Solana Policy Institute has launched a significant regulatory intervention, formally urging the U.S. Securities and Exchange Commission to exclude decentralized finance developers from traditional broker regulations. This crucial request highlights the growing tension between innovative blockchain technology and established financial oversight frameworks. The institute’s detailed submission represents a pivotal moment for the entire DeFi ecosystem’s regulatory future.
Solana Policy Institute Challenges SEC Regulatory Framework
The non-profit blockchain policy organization submitted comprehensive recommendations to the SEC this week. Consequently, these proposals aim to fundamentally reshape how regulators approach decentralized technologies. The institute specifically argues that current regulatory frameworks fail to distinguish between fundamentally different technological architectures. Moreover, this distinction becomes increasingly critical as blockchain adoption accelerates across financial markets.
Historically, the SEC has applied securities laws developed decades before blockchain technology existed. However, the institute contends that this approach creates regulatory confusion for developers building open-source, non-custodial software. The organization’s recommendations arrive during a period of intense regulatory scrutiny across the cryptocurrency sector. Furthermore, these proposals could establish important precedents for how governments worldwide regulate decentralized technologies.
Distinguishing Centralized Exchanges from DeFi Software
The core argument centers on the fundamental technological differences between centralized platforms and decentralized protocols. Centralized cryptocurrency exchanges operate similarly to traditional financial intermediaries. They control user assets, manage order books, and exercise discretion over transactions. In contrast, non-custodial DeFi software operates as permissionless, automated protocols that execute predetermined functions without intermediary control.
Key distinctions highlighted in the submission include:
- Custody and Control: Centralized exchanges maintain custody of user assets, while DeFi protocols never control user funds
- Discretionary Authority: Exchanges exercise human discretion over operations, whereas DeFi protocols execute code-based rules automatically
- Architectural Design: Exchanges use centralized servers, while DeFi operates on distributed blockchain networks
- Access Restrictions: Exchanges can restrict user access, while DeFi protocols remain permissionless by design
Regulatory History and Current Context
The SEC’s regulatory approach to cryptocurrency has evolved significantly since 2017. Initially, the commission focused primarily on initial coin offerings and token classification. Subsequently, attention shifted toward trading platforms and intermediary services. The 2023 enforcement actions against several centralized exchanges established clearer expectations for traditional cryptocurrency businesses. However, the regulatory status of decentralized protocols remained ambiguous throughout this period.
Recent court decisions have created additional complexity for regulators. For instance, the 2024 ruling in SEC v. DeFi Protocol established that pure software development might not constitute broker activity. Meanwhile, international regulators have adopted varying approaches. The European Union’s Markets in Crypto-Assets regulation explicitly distinguishes between different types of service providers. Similarly, Singapore’s Payment Services Act creates separate categories for different technological implementations.
Proposed Amendments to SEC Rule 3b-16
The institute specifically targets Rule 3b-16 under the Securities Exchange Act of 1934. This rule currently defines what constitutes an “exchange” for regulatory purposes. The proposed amendment would explicitly exclude open-source software code from this definition. Such exclusion would recognize that software tools differ fundamentally from organizational entities that facilitate securities transactions.
This proposed change aligns with technological reality rather than forcing software into outdated regulatory categories. The institute argues that regulating code as an exchange creates logical inconsistencies. After all, software cannot exercise discretion, maintain custody, or perform the functions traditionally associated with exchange operators. Additionally, this approach could encourage innovation while maintaining appropriate oversight of actual intermediaries.
| Regulatory Element | Current SEC Approach | Proposed SPI Framework |
|---|---|---|
| Definition of Exchange | Includes systems that bring together buyers and sellers | Excludes non-custodial, automated software protocols |
| Developer Liability | Potential broker-dealer registration requirements | Exemption for open-source software creators |
| Custody Determination | Based on asset control and user agreements | Clear technical criteria for non-custodial status |
| Compliance Framework | One-size-fits-all intermediary regulations | Activity-based differentiation |
Custody and Control-Based Regulatory Framework
The institute advocates for a custody and control-based framework to differentiate blockchain activities. This approach would focus regulatory attention where it matters most: on entities that actually exercise control over user assets. Under this framework, regulatory obligations would correspond directly to the level of control an entity exercises. Entities with significant control would face correspondingly significant regulatory requirements.
Conversely, developers creating non-custodial tools would operate under different standards. They would focus on software security, transparency, and disclosure rather than financial intermediary compliance. This framework recognizes that different technological implementations create different risks. Therefore, regulations should address those specific risks rather than applying blanket rules across disparate technologies.
Expert Perspectives on Regulatory Innovation
Financial technology experts have increasingly advocated for nuanced regulatory approaches. Dr. Sarah Chen, blockchain governance researcher at Stanford University, explains the technical distinctions. “The custody question represents the fundamental dividing line,” Chen states. “When developers never touch user assets, applying intermediary regulations creates compliance impossibility.”
Former SEC commissioner Hester Peirce has similarly advocated for regulatory clarity. “Innovation thrives under clear rules,” Peirce noted in recent congressional testimony. “Developers need to understand their obligations before building, not face enforcement actions years later.” These expert perspectives highlight the growing consensus around the need for regulatory modernization.
Potential Impacts on DeFi Innovation and Security
The regulatory approach ultimately adopted will significantly impact several areas. Innovation velocity represents one crucial consideration. Overly broad regulations could drive developers to jurisdictions with clearer frameworks. Conversely, appropriate distinctions could encourage responsible innovation within regulatory boundaries. The United States risks losing technological leadership without sensible regulatory approaches.
Security practices represent another critical area. Clear regulations could establish standards for secure software development. However, inappropriate regulations might discourage security research and disclosure. The institute’s framework aims to balance innovation encouragement with appropriate consumer protections. This balanced approach could benefit both technological advancement and market integrity.
Market structure represents a third important consideration. Appropriate regulatory distinctions could foster diverse, resilient financial ecosystems. Different technological approaches could coexist with appropriate regulatory frameworks. This diversity could enhance financial system robustness against various failure modes. Ultimately, thoughtful regulation could strengthen rather than stifle technological progress.
Conclusion
The Solana Policy Institute’s recommendations represent a crucial intervention in the ongoing debate about DeFi regulation. The institute urges the SEC to adopt nuanced approaches that recognize technological realities. Clear distinctions between centralized exchanges and non-custodial software could foster innovation while maintaining appropriate oversight. As blockchain technology continues evolving, regulatory frameworks must similarly evolve. The coming months will reveal whether regulators embrace this technological sophistication or apply outdated frameworks to novel technologies.
FAQs
Q1: What specific changes does the Solana Policy Institute recommend?
The institute recommends three primary changes: publishing guidance separating non-custodial software from broker transactions, amending Rule 3b-16 to exclude open-source code from exchange definitions, and adopting a custody and control-based regulatory framework.
Q2: How would these changes affect ordinary DeFi users?
Users would experience clearer regulatory environments with potentially improved security standards. However, their fundamental interactions with DeFi protocols would remain largely unchanged, as the proposals focus on developer regulations rather than user restrictions.
Q3: What distinguishes centralized exchanges from DeFi protocols technically?
Centralized exchanges control user assets, use centralized servers, and exercise human discretion. DeFi protocols never custody assets, operate on decentralized networks, and execute automatically based on predetermined code.
Q4: How have other countries approached DeFi regulation?
The European Union’s MiCA regulation creates distinct categories for different service types. Singapore’s Payment Services Act similarly distinguishes between various technological implementations, often providing clearer guidelines than current U.S. approaches.
Q5: What happens if the SEC doesn’t adopt these recommendations?
Without clearer guidelines, regulatory uncertainty may continue discouraging U.S.-based DeFi innovation. Developers might relocate to jurisdictions with clearer frameworks, potentially reducing American technological leadership in blockchain development.
