After Binance and Coinbase, Are Sovryn and DeFi Next on the SEC Radar?

The U.S. Securities and Exchange Commission has a long arm. On Monday (June 5, 2023) they extended that arm and filed suit against Binance, the largest crypto exchange in the world. The SEC claimed among several other charges that Binance was operating as an unlicensed securities exchange. A day later they filed a similar charge against Coinbase, another large crypto exchange. These actions roiled the bitcoin and crypto markets and created significant concerns in the crypto community. Since Sovryn includes markets for crypto assets and is unregistered, could Sovryn and similar decentralized exchanges be next?

A little context. Sovryn is a decentralized bitcoin-oriented platform, offering trading and lending, Bitcoin loans, and similar products. Sovryn leverages the power of smart contracts on the Rootstock network, a sidechain of the bitcoin blockchain that uses a form of bitcoin pegged to mainchain bitcoin as the coin of the sidechain and gas for transactions. As the world of decentralized finance (DeFi) blossoms, questions around the regulatory requirements for platforms like Sovryn are inevitably arising. However, contrary to common misconceptions, Sovryn is not an unregulated exchange in the traditional sense, nor is it subject to SEC regulations.

Traditional centralized exchanges—like those that allow people to trade stocks or currencies—must abide by SEC regulations in the United States. These regulations have a stated goal of protecting investors, preventing fraud, and ensuring fair and orderly markets. Centralized exchanges serve as custodians of assets and facilitators of transactions. For these reasons they are potential points of failure or manipulation. Their custody and practices are opaque to users. Regulation is an attempt to protect customers from this opaqueness and information asymmetry. Sovryn takes a significantly different approach to financial trading and other transactions in contrast to traditional exchanges. Sovryn operates as a decentralized platform operating on a public, transparent, open-source, and permissionless blockchain. These characteristics eliminate single points of manipulation or failure. This approach fundamentally changes the nature of financial transactions, introducing a level of transparency and democratization not found in conventional exchanges.

Sovryn provides an open-source infrastructure that allows users to interact directly with smart contracts published on the blockchain. These smart contracts are self-executing agreements written in lines of code, automatically executing transactions between buyers and sellers when predetermined conditions are met. In essence, Sovryn provides the tools, and the users themselves conduct the trading directly with one another, interacting via these smart contracts using their digital wallets.

This operational model has significant implications for the applicability of regulatory frameworks, especially those established by the SEC. The SEC's jurisdiction primarily concerns securities and the entities that issue, trade, or manage them, usually acting as intermediaries in these transactions. Sovryn's approach, where trading is conducted directly between users via smart contracts, doesn't fit neatly into this framework. It does not hold user assets or execute trades on behalf of users. This model clearly falls outside the traditional jurisdictional scope of the SEC. Sovryn is also outside the territorial scope of the SEC. Because it is a decentralized entity, Sovryn cannot be considered a company operating within the jurisdiction of the U.S. and under the regulatory scope of the SEC. The SEC has no authority over a decentralized entity like Sovryn.

Sovryn’s decentralized nature also means it has no centralized authority that could be held accountable by the SEC. The protocol is governed by a decentralized community of pseudonymous SOV token holders. This decentralized governance puts Sovryn outside the traditional jurisdictional scope of the SEC.

A common misconception is that all crypto exchanges are under the jurisdiction of the SEC. However, the primary role of the SEC is to regulate securities such as stocks and bonds and entities that issue, trade, or manage these assets. This definition does not automatically apply to all cryptocurrencies or DeFi platforms.

Bitcoin is regarded as a commodity by the U.S. Commodity Futures Trading Commission (CFTC) It is not regarded as a security by the SEC. Sovryn's operations primarily involve trading, borrowing, and lending bitcoin, which falls outside the purview of the SEC. While the SEC has asserted that the Howey Test confirms that many tokens similar to SOV are securities, this interpretation of the law has not yet been established by legal precedent. Even if this happens, the lack of territorial jurisdiction by the SEC remains.

We should note that Sovryn and platforms like it are not without rules just because they are not regulated by the SEC or similar bodies. They operate under the rules embodied in their code and the consensus mechanisms embedded in their blockchain. These rules are transparent, enforced programmatically, and subject to the governance process of the platform's users.

Sovryn aims to bring financial sovereignty to the masses just as bitcoin has brought the promise of monetary sovereignty. A decentralized, open, permissionless blockchain allows financial transactions to be performed by individual users controlling their own assets and without the potential for manipulation by companies or regulators. The Sovryn Dollar is just one asset available through the Sovryn protocol that allows users to break free of traditional banks and exchanges while holding value and transacting in the world’s current reserve currency. Bitcoin on Sovryn allows users to hold and engage in financial transactions in the world’s next reserve currency.

What is Sovryn?

Sovryn is a decentralized platform focused on bitcoin, providing services like trading, lending, and bitcoin loans. It operates on the Rootstock network, a bitcoin blockchain sidechain, and leverages smart contracts for transactions.

How is Sovryn different from traditional exchanges?

Unlike traditional exchanges, Sovryn operates in a decentralized manner on a transparent, open-source, and permissionless blockchain. Users interact directly with smart contracts to conduct transactions, eliminating single points of manipulation or failure and ensuring a high degree of transparency.

Is Sovryn under SEC regulation?

As of current understanding and law, Sovryn isn't subject to SEC regulations. Sovryn's decentralized nature and direct user-to-user trading model don't fit the traditional securities framework that the SEC regulates.

Can the SEC regulate decentralized platforms like Sovryn?

It's a complex issue. Currently, the SEC's jurisdiction primarily involves securities and intermediaries in transactions of securities. Decentralized platforms where trading occurs directly between users, such as Sovryn, don't neatly fit into this framework.

What are SOV tokens?

SOV tokens are used within the Sovryn platform and form part of its decentralized governance model. Token holders have a say in the platform's governance decisions.

Are cryptocurrencies like bitcoin considered securities by the SEC?

No, bitcoin is considered a commodity by the U.S. Commodity Futures Trading Commission (CFTC), not a security by the SEC. Therefore, platforms like Sovryn, which primarily deal with trading, borrowing, and lending bitcoin, generally fall outside the SEC's purview.

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The views and opinions expressed in this blog post are solely those of the author. Sovryn, as a decentralized protocol, does not have the ability to make legal claims or endorse individual viewpoints. The content provided in this blog post is for informational purposes only and should not be considered as professional advice or an official position of the protocol. Readers are encouraged to conduct their own research and seek appropriate guidance before making any decisions based on the information provided.