DeFi Lending Rules Examined by SEC Task Force in Crypto Meeting

TLDR

• The SEC Crypto Task Force met with DeFi firm Term Finance to discuss regulatory challenges surrounding DeFi lending rules.
• Term Finance explained its model of short-term, fixed-rate lending using overcollateralized crypto assets in tri-party repurchase structures.
• The SEC examined the Reves and Howey tests to assess whether Term Finance’s loans and tokens could be classified as securities.
• Term Finance emphasized risk mitigation measures like overcollateralization, decentralized price oracles, and real-time auditability to protect investors.
• The SEC expressed interest in continued engagement with the industry through programs such as regulatory sandboxes and reassessments.

The U.S. Securities and Exchange Commission (SEC) Crypto Task Force held a meeting with DeFi firm Term Finance on Sept. 15. The focus was on the regulatory challenges related to DeFi lending rules. The discussion highlighted how Term Finance’s model operates and the ways it manages risk.

SEC Reviews DeFi Lending Rules with Term Finance

The SEC memo revealed that the meeting focused on addressing the regulation of crypto assets under DeFi lending rules. Term Finance explained its approach to short-term, fixed-rate lending. The firm’s model uses overcollateralized crypto assets in tri-party repurchase structures, executed via smart contracts for non-custodial execution.

During the meeting, the SEC examined the Reves test and Howey test to assess if loans resemble exempt notes. These tests are used to determine whether assets could be classified as securities. Term Finance raised concerns about how retail participation and secondary markets could affect regulatory classification.

Risk Mitigation and Compliance Measures

Risk mitigation was another key topic discussed in the meeting. Term Finance highlighted mechanisms such as overcollateralization, decentralized price oracles, and real-time auditability. The company emphasized that these mechanisms align with investor protection principles under DeFi lending rules.

Additionally, Term Finance expressed interest in engaging with the SEC through regulatory sandbox programs. They suggested that ongoing reassessments and transparent communication could avoid misclassifying loans or tokens. This approach would ensure better clarity in the regulatory landscape surrounding DeFi lending rules.

Ongoing SEC Engagement with Industry

The SEC’s Crypto Task Force, led by Commissioner Hester Peirce, is actively engaging with the industry. The task force is holding roundtables, public input sessions, and meetings to refine DeFi lending rules. A public roundtable is scheduled for October 17 to discuss privacy and financial surveillance in crypto markets.

Despite regulatory uncertainties, the SEC’s engagement with industry participants continues. The memo reflects the growing industry consensus that transparent DeFi lending protocols can enhance risk management. These innovations could promote institutional adoption while maintaining compliance with regulatory standards.

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