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The SEC has Declared War on DeFi. Here’s How to Avoid Collateral Damage

January 30, 2023
30 Jan 2023 : 22:13
Updated : 15 Feb 2023 : 10:49
5 min read

We don’t typically get philosophical, so indulge us with a rare foray. Here’s a question – what, truly, constitutes a proper investible asset?

Last week, the SEC sued crypto trader Avraham Eisenberg for an attack on Mango Markets. The notorious investor’s “highly profitable trading strategy” drained the DeFi exchange platform of over $116 million. The more fascinating aspect of the case was the asset at the heart of it – in its lawsuit, the regulator labelled Mango’s governance token, $MNGO, a security.

For those in the know, this is a serious development. Without an exemption, selling securities without first registering them with the SEC is illegal. Mango Markets and numerous other DeFi products have failed to do this. 

What does this mean? Is this the beginning of a regulatory crackdown, and is your favourite project at risk? 

Let’s find out…


  • The SEC claims $MNGO is a security.
  • It’s currently illegal for a security to trade without being registered with the SEC.
  • If $MNGO is found to be a security, the SEC may use this as leverage to crack down on similar projects. This could mean the end of many of your favourite DeFi investments.
  • To spare themselves from the SEC’s wrath, DeFi projects in the US need to prioritise decentralisation.
  • There are steps you can take to protect your portfolio by diversifying across assets that are likely not to be deemed securities. This would require a review under the Howey Test. We’re happy to help.

Sir, we have a security breach

The term “security” refers to a range of financial assets such as stocks, bonds, notes, and investment contracts. In the US, all securities must be registered with the SEC in order to be sold or otherwise offered to investors. 

These regulations are designed to protect the public from investments that are considered to carry above-average risk.  

Wait, so we’re allowed to gamble away our life savings in a Las Vegas casino, but we can’t invest in a start-up? Sure, those intentions seem pure.

To determine whether or not a digital asset is a security, the SEC uses a tool called the Howey Test. This test lays out four criteria: investment of money, common enterprise, expectation of profit, and derived effort from others. 

If an asset falls in the centre of the four-corner diagram, it’s deemed a security. Let’s see how $MNGO stacks up…

What’s the future for Mango Markets? 

It’s unclear what the outcome of the Mango Markets case will be. However, it serves as a warning to DeFi projects based in the US and those that have sold tokens to US investors.

If $MNGO is deemed a security, the SEC will surely use this as leverage to investigate other DeFi projects.

The SEC has already conducted similar investigations into firms such as Ripple, Gemini, and Telegram due to their centralisation. The performance of their tokens will always be dependent on the companies upholding their commitments. 

Cryptonary’s Take

All that said, we believe it’s unlikely that the SEC will initiate an industry-wide crackdown on DeFi projects. They’ve barely been able to fight their way out of a paper bag dealing with just one (Ripple).

However, it is likely that DeFi projects that remain highly centralised, or have sold governance tokens to US investors, will face scrutiny this year.

The truth is a lot of these projects will probably be considered securities. This is very likely to affect prices, so we strongly recommend reviewing one’s portfolio to see if it holds any potential regulatory targets.

We predict that, in the long term, crypto will be divided into two classes, similar to how the internet was divided into the “clear web” and the “dark web.”

The clear half of DeFi will adhere to regulations imposed by authorities, even if this means some projects have to sacrifice their initial goals. This might mean introducing “know your customer” processes, or giving up the ambition of sharing revenue with token holders, among other compromises/sacrifices.

The dark projects will be driven further towards anonymity while trying to ensure they’re decentralised enough that regulators cannot shut them down.

We’re still investing and holding various DeFi tokens while acknowledging the risk of a sudden clampdown by the SEC. If that were to happen, we believe the effect would be pretty bad but temporary. The United States is only one jurisdiction in the world.

Our theory is that if they were to clamp down on DeFi, other countries would embrace it and attract the capital themselves. We believe US regulators are smarter than that, we could be wrong, though. 

Action Points

1: Read the SEC’s claims against Mango Markets. Then, use the Howey Test criteria to help determine whether the token you’re investing in is a security or not.

2: As the SEC is the regulator of American financial markets, find out whether the project’s team is located in the country or whether they sold tokens to US investors during their launch.

3: Ask project stakeholders about their views on regulation and find out how the project intends to avoid getting into trouble with the SEC. 

Note: It’s a big red flag if the project doesn’t have a realistic plan for compliance, and if its token meets most or all of the Howey test criteria.


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