The Solana Policy Institute, a nonprofit focused on blockchain policy, urged the United States Securities and Exchange Commission (SEC) to distinguish between centralized crypto exchanges and non-custodial decentralized finance (DeFi) software, arguing that developers should not be regulated as intermediaries.
The Friday letter urges the SEC to protect the developers of DeFi apps by recognizing that developing and publishing non-custodial code is not the same as intermediating or controlling the underlying funds.
The letter argues that treating developers of non-custodial protocols under the Exchange Act 3b-16 would be inappropriate, as this applies to exchange operators that custody assets, control execution flow, and act as intermediaries:
“Transactions that take place via a smart contract protocol are not the regulatory equivalent of trading on an exchange or ATS and should not be treated as such.”
The institute called on the SEC to issue guidance on differentiating between non-custodial software tools and exchanges with brokers.
It also urged the agency to amend Act 3b-16 to exclude open-source code from the “exchange” definition and adopt a custody-and-control-based framework to draw lines between intermediated and disintermediated blockchain activity.
Solana Policy Institute letter to SEC. Source: SEC
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The letter further argued that treating DeFi code in the same manner as centralized trading platforms risks “discouraging innovation” and pushing activity offshore to “unregulated channels,” thereby reducing the competitiveness of the US.
To protect DeFi developers and onshore activity, the SEC should establish “clear, durable lines between software tools and actual intermediaries that exercise custody, discretion, or control over funds or transactions,” the letter adds.
The issue of developer liability has drawn heightened attention in recent years, particularly after criminal cases involving developers of non-custodial protocols, such as Tornado Cash co-founders Roman Storm and Alexey Pertsev, who were found guilty of operating an unlicensed money-transmitting business despite their protocol being non-custodial and never controlling user funds.
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US Senators push for blockchain developer protection
Separately, US Senators Cynthia Lummis and Ron Wyden introduced legislation Monday seeking to protect blockchain developers who don’t directly handle user funds and are exempt from money transmitter regulations.
Source: Cynthia Lummis
The Blockchain Regulatory Certainty Act seeks to clarify that writing software or maintaining networks shouldn’t trigger federal or state money-transfer requirements, which have been a growing concern for developers.
“Blockchain developers who have simply written code and maintain open-source infrastructure have lived under threat of being classified as money transmitters for far too long,” wrote Lummis in a statement, adding that the bill seeks to provide developers with more clarity for building the “future of digital finance without fear of prosecution.”
The long-awaited crypto market structure bill, also known as the CLARITY Act, includes similar developer protection measures.
The US Senate Agriculture Committee has delayed its markup of the crypto market structure bill until late January, with Chairman John Boozman saying the panel needs additional time to secure broader bipartisan support. Boozman said Monday that the committee has made “meaningful progress” and held “constructive discussions,” but emphasized that advancing a bill with cross-party backing remains the priority.
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