The DeFi market is warming up and participants are increasingly considering allocating part of their funds towards the crypto sub-sector.

But a recent legal proceeding may indicate there are regulatory struggles ahead. In the crosshairs are projects working on crypto-swaps or derivative models.

Last week, Bitcoin and crypto wallet Abra came under the SEC scanner for selling equality-linked synthetic swap products to customers using their crypto holdings. 

But this was illegal, said regulators. Both the U.S. SEC and CFTC bodies levied a $300,000 (in total) penalty on the application. 

Abra first introduced the swap features in February last year. Users could purchase U.S. equities and indices using their crypto holdings. I.e, if someone wanted to buy Tesla stock using Bitcoins or any of the other 24 supported digital tokens, they could.

The SEC soon shut the model down. But Abra didn’t budge. They shifted the model to users outside of the U.S. in June 2019, bringing in Manila’s Platus Technology as a partner.

But fate caught on. Abra was charged last week after regulators found out some U.S-based users and Abra employees continued to deal with crypto-linked equity swaps.

Abra has since said it is discontinuing the swap feature (it said that the last time too) and will continue to function as a Bitcoin wallet.

The ruling led some analysts and industry observers to draw parallels to the broader DeFi landscape.

Maya Zehavi, a founding member of the Israel Blockchain Forum, opinionated in a tweet the SEC and CFTC “don’t like DeFi:”

me thinks the SEC & CFTC are starting to signal they don't like DeFi.

SEC: A synthetic swap is a security violation
CFTC: its an illegal off-exchange swaps in digital assets and foreign currency https://t.co/OXzC7Qu70Phttps://t.co/OXzC7Qu70P

— Ma/ya Zehavi (@mayazi) July 13, 2020

“Note that the legal construct Abra used in these swap contracts is essentially the same as those underlying most DeFi products. hence, they can potentially face the same exact charges,” said Zehavi in a follow-up tweet.

Most governance tokens, such as Compound and others, work on a model that seeks to capture value the protocol presents.

That value — or yield — comes from traders and investors borrowing tokens at high rates for their activities.

While Compound’s at a relatively nascent stage, DeFi posterchild Maker has an established model that mirrors share buybacks. The protocol pools together interest paid by borrowers, buys MKR through an auction and burns the rest.

However, this does not mean all DeFi tokens are necessarily a future SEC target. Compound was recently listed on Coinbase; the latter is famous for its iron-clad compliance measures.

Besides, the legal framework around cryptocurrencies is still scant and developing, meaning years before DeFi tokens are clearly and legally defined by U.S. courts.

Regardless—it’s the exclusion of court orders and centralized censorship at the center of all DeFi- and crypto-projects. Succumbing to the former would send a rather ironic signal.

The post Recent Bitcoin ruling shows the U.S. SEC is not a DeFi fan—yet appeared first on CryptoSlate.

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