SEC Commissioner Hester Peirce: Why there is no need for a legal exemption

SEC Commissioner Pierce makes clear that truly decentralized DeFi can operate without a waiver

On September 17, Hester Peirce of the Securities and Exchange Commission (SEC) drew a clear line on decentralized finance. She said that investors do not need any regulatory exemption when they use unlicensed smart contracts for peer-to-peer trading. The SEC's related actions with the Commodity Futures Trading Commission (CFTC), which are discussed in this article, set different boundaries for their respective control over intermediaries.

It should be noted that Peirce's statement represents his personal position only. Formal action at the SEC level is still required to form a binding formal definition of decentralized peer-to-peer cryptocurrency. Currently, neither the SEC order on tokenized securities nor another staff statement clearly defines what Peirce calls true decentralization, with specific provisions focused on aspects such as hosting, access, software count, entry fees, recommendations, routing and execution.

These actions are based on different regulations and have different legal effect, but they all demonstrate that federal regulators are reviewing the authority reserved for identifiable service providers. There is currently no unified set of criteria at the federal level to apply to decentralized bribery.

The SEC's Regulatory Perspective: From the Market to the Front End

The SEC's Tokenized Securities Order, issued on September 17, was formally promulgated by the Commission to provide a temporary, conditional exemption for certain types of tokenized securities trading venues (TSV) that utilize automated market making (AMM) pools of funds for licensing transactions in tokenised NMS shares.

Under the order, TSV assumes two functions: to provide one or more pools of AMM funds for licensees and establish access criteria. The term "pools" is interpreted as a functional interpretation of commands that specify which pool of funds qualifies as a pool; deploying trading contracts, modifying rules or parameters, setting fees, or retaining authority to suspend transactions also constitutes a pool of providing pools or controlling pools. Administrative tasks such as coding white lists are excluded from this definition.

Even when transactions are executed by an automated system, many key decisions remain in the hands of humans: choosing a trading venue, setting fees, suspending operations, deciding access etc. Peirce explicitly excludes this command from decentralized finance and describes truly unlicensed software as another model. This license-based exchange properly illustrates that operating authority is still critical even if trades are automatically executed with smart contracts.

The front-end interface constitutes another layer of control. A statement issued by the SEC's Trading and Markets Division in April this year stated that staff would not object to certain cryptoasset securities interface providers operating without a registered broker if they were eligible. However, its legal effect is limited: the statement only represents the staff position, has no legally binding force, does not create new obligations, and will be deemed automatically revoked after five years if the Commission fails to take further action before 13 April 2026.

The interfaces covered by this statement help users prepare for transactions through self-hosted wallets: the user has a private key, selects or customizes trading parameters, signs and sends transaction instructions. Multiple execution pathways displayed on the interface must be able to be filtered or sorted according to objective factors; when only one pathway is shown, if other options are available, they must be viewable by the user.

The statement also excludes functions that are closer to brokerage: soliciting trades in securities of specific crypto-assets, recommending investments, holding or accessing user assets, executing or settling transactions, and accepting or sending orders.

The way in which fees are charged is equally critical. Staff members said they would not object if users paid a fixed fee or proportionate fee that was objectively determined, uniformly applied and maintained neutrality between products, routes, venues and counterparties; while payments from third parties based on transaction size or completion were outside the scope of this position.

These conditions bring the front-end into the regulatory analysis category. Default settings, path ordering, preferred venues and fee incentives that users end up signing transactions from self-hosted wallets may also guide user behavior.

Position of the CFTC: Allowing more promotion under a narrower registration framework

The CFTC's announcement on the same day, along with Staff Letter No. 26-25, was a stance of inaction. Its Market Participant Division stated that it would not recommend enforcement action against qualified entities providing passive software based on unregistered referral brokers and would not hold those involved accountable for their non-registration affiliations.

This position applies if the user, as a member, trades directly in designated contract markets (DCM) or indirectly through futures brokers or introducing brokers who are DCM members. The position is based on submitted facts and does not affect existing authority of the Commission and may be changed, suspended or terminated by that department at any time.

Compared to the SEC's interface statement, this position allows for more promotion and charging behavior. Providers can promote specific derivatives, direct users to use a particular registrar, charge transaction fees from users, and share revenues with the registry.

But the provider must remain non-interventionist in several key respects: users must be able to contact the registry directly; they may not custody or control client assets, issue clear buy/sell signals, actively intervene on specific orders and have discretion over routing or execution.

In addition, this exemption is subject to a series of accompanying requirements: disclosure of information, marketing controls, written commitments with the registrar, record keeping and reporting to that department. These requirements preserve accountability mechanisms while diverting software providers from introducing brokers' registration systems.

The six types of control that make up the core difference

The differences in the above-mentioned regulatory framework are mainly reflected in six categories of control:

Custody of childrenThe SEC interface statement prohibits providers from holding or accessing user assets; the CFTC position forbids custodianship of, or control over, client property. Both require segregation with respect to client properties.

Access toThe TSV sets standards for participants, the interface statement requires disclosure of venue restrictions; the CFTC's position is that users are required to trade in DCMs directly or through member institutions and retain a direct link with the registry. Each document has its own rules on access structures.

RecommendedThe SEC interface statement excludes specific trade solicitation and investment recommendations; the CFTC position allows for promotion, but excludes explicit buy/sell signals.

RoutesThe position of the SEC prohibits accepting or sending orders, and alternative routes must be displayed based on objective parameters. Under the CFTC's position, users can send their own instructions but providers cannot have discretion over whether to route or execute them. While the former excludes order routing altogether, the latter focuses on the discretions themselves.

CostsThe SEC's position requires that fees paid by users be objectively determined and remain neutral; the CFTC's stance allows for a division of transaction fees and registrar revenues. Fees are treated separately within each regulatory framework.

Parameters and pause permissionsUnder the SEC's order framework, modifying pool rules, parameters, fees or suspending trading may mean that an entity is providing leverage to a portion of the pool; the CFTC letter does not give these powers central status. This factor falls within the specific venue exemptions contained in the SEC Order.

Each factor is constrained by the narrow scope of its source documentation: Commission orders regulating only one securities exchange model; SEC's Trading and Markets Division expresses a non-binding position solely on its Article 15; CFTC staff provides conditional enforcement leeway within registered derivatives markets.

Therefore, technical design is equally important as information disclosure, access arrangements, marketing restrictions, record preservation and retention rights. The combination of relevant factors varies depending on the securities marketplace, cryptographic interface or derivative software.

Who defines a truly decentralized yoga?

The principle given by Peirce is that removing a trusted intermediary weakens the regulatory foundation built around it. But her personal statement has no effect on establishing the committee category.

The authority is dispersed between the following actions: the Commission defines the scope of a TSV order; the SEC's Trading with Markets Division applies its own non-binding Rule 15 position; and the CFTC Market Participant Division judges whether submitted facts conform to its conditional enforcement posture. Each judgment answers questions that arise under specific regulations and in particular exemption forms.

A protocol, its governance processes and its front-end interfaces may be in different places on the control spectrum: core protocols might be difficult to modify while the interface can still be curated, charged and guided by users; software could also connect users with regulated entities while keeping orders, assets and execution loops under user control.

For developers and users, the actual analysis should start with specific authority: who controls access to assets? Who can recommend, route or execute transactions? Who sets fees or modifies software parameters? Who has the right to suspend a system? The applicable regulations and subjects exercising these powers are decided by which regulatory body based on what legal criteria.

These actions by the SEC and CFTC are outlined in a fact-based authority map that maps commission orders with staff positions along individual boundaries.