Solana Policy Institute Urges Critical SEC Shift: Exclude DeFi Developers from Broker Regulations

WASHINGTON, D.C. – March 2025 – The Solana Policy Institute has delivered a crucial policy recommendation to the U.S. Securities and Exchange Commission, urging regulators to create clear distinctions between centralized cryptocurrency exchanges and non-custodial decentralized finance software. This formal request represents a significant development in the ongoing debate about DeFi regulation and broker definitions. The institute specifically argues that developers of open-source, non-custodial protocols should not face regulation as financial intermediaries under existing frameworks.

Solana Policy Institute Calls for SEC Regulatory Clarity

The Solana Policy Institute submitted detailed recommendations to the SEC’s Division of Trading and Markets earlier this month. These recommendations specifically address how the Commission should approach decentralized finance within its regulatory purview. The non-profit organization, which focuses exclusively on blockchain policy research and advocacy, presented a three-part framework for regulatory distinction. This framework aims to protect innovation while maintaining appropriate oversight of financial markets.

Furthermore, the institute’s proposal comes during a period of increased SEC scrutiny of cryptocurrency platforms. Recent enforcement actions have targeted various entities operating in the digital asset space. Consequently, industry participants have expressed concerns about regulatory overreach into software development. The Solana Policy Institute’s intervention seeks to establish clear boundaries before additional enforcement actions create legal uncertainty.

Distinguishing Between Custodial and Non-Custodial Systems

The core argument centers on the fundamental difference between custodial and non-custodial systems. Centralized exchanges like Coinbase and Binance maintain control over user assets. They act as traditional intermediaries in financial transactions. In contrast, non-custodial DeFi protocols operate as software tools that users interact with directly. These protocols never take possession of user funds during transactions.

For instance, popular DeFi applications on the Solana blockchain include lending platforms and decentralized exchanges. Users connect their self-custodied wallets to these applications. The software executes code based on predetermined parameters. No central entity controls the assets or dictates transaction terms. This technical distinction forms the basis of the policy argument against broker classification.

The Technical Architecture of DeFi Protocols

DeFi protocols typically consist of smart contracts deployed on public blockchains. These self-executing contracts contain the rules for financial operations. Users interact with these contracts through web interfaces or wallet applications. The protocol developers create and deploy the initial code. However, they generally do not operate or control the live systems. Community governance often manages protocol upgrades and parameter changes.

This decentralized architecture presents unique regulatory challenges. Traditional financial regulations assume the presence of identifiable intermediaries. DeFi systems eliminate or redistribute these intermediary functions across code and community. The Solana Policy Institute argues this architectural difference requires regulatory recognition. Otherwise, developers could face liability for activities they do not control.

Proposed Regulatory Framework and Rule Changes

The institute’s recommendations include three specific regulatory actions. First, they request formal SEC guidance distinguishing non-custodial software from broker transactions. This guidance would provide clarity for developers building decentralized applications. Second, they propose amending Rule 3b-16 under the Securities Exchange Act of 1934. The amendment would explicitly exclude open-source code from the definition of an exchange.

Third, the institute advocates for a custody and control-based regulatory framework. This approach would focus regulation on entities that exercise control over user assets. The framework would distinguish between intermediary and non-intermediary blockchain activities. This distinction aligns with the SEC’s historical approach to technology regulation. The Commission has previously distinguished between technology providers and financial service providers.

Key proposed distinctions include:

• Custody-based regulation: Entities holding customer assets face stricter requirements
• Control determination: Regulatory status depends on operational control over transactions
• Software classification: Distinguishing between tools and service providers
• Developer protections: Safeguards for creators of open-source financial software

Historical Context of SEC Cryptocurrency Regulation

The SEC has gradually expanded its cryptocurrency regulatory approach since 2017. Initial actions focused on initial coin offerings and fraudulent schemes. Later enforcement targeted unregistered securities offerings through various platforms. Recent years have seen increased attention on trading platforms and intermediary services. The Commission’s 2023 actions against several cryptocurrency exchanges established important precedents.

However, DeFi protocols present novel regulatory questions. The SEC’s 2024 report on decentralized finance acknowledged these complexities. Commission officials have expressed concerns about investor protection in DeFi ecosystems. Simultaneously, they recognize the innovation potential of blockchain technology. This tension between protection and innovation informs current policy discussions.

Comparative International Approaches

Other jurisdictions have developed distinct approaches to DeFi regulation. The European Union’s Markets in Crypto-Assets (MiCA) regulation includes provisions for decentralized systems. MiCA creates specific categories for crypto-asset service providers. It also includes exemptions for fully decentralized protocols. Singapore’s Payment Services Act takes a similar activity-based approach. These international frameworks provide useful comparisons for U.S. regulators.

The table below compares regulatory approaches:

Potential Impacts on DeFi Innovation and Development

The regulatory approach to DeFi developers could significantly impact innovation. Strict broker regulations might discourage U.S.-based development of decentralized protocols. Developers could relocate to jurisdictions with clearer regulatory frameworks. This potential exodus concerns technology leaders and policymakers alike. The United States risks losing its competitive edge in blockchain innovation.

Conversely, appropriate regulatory clarity could foster responsible innovation. Developers would understand their legal obligations and limitations. Investors would benefit from clearer protections and disclosures. The ecosystem could mature with appropriate guardrails against fraud and manipulation. This balanced approach supports both innovation and consumer protection.

Recent data shows substantial DeFi development activity. The Solana ecosystem alone hosts hundreds of decentralized applications. These applications facilitate billions of dollars in transactions monthly. Regulatory uncertainty threatens this growing economic sector. Clear guidelines would provide stability for developers and users.

Industry and Expert Responses to the Proposal

Blockchain industry associations have generally supported the institute’s recommendations. The Crypto Council for Innovation issued a statement endorsing the custody-based framework. Several academic experts in blockchain law have praised the technical precision of the proposal. These experts emphasize the importance of distinguishing between technology and financial services.

However, some consumer protection advocates express reservations. They argue that all financial activities require appropriate oversight. These advocates support regulation based on economic function rather than technical structure. This philosophical difference represents the central tension in DeFi regulation debates.

Legal scholars note that the proposal aligns with existing technology regulation principles. The Supreme Court has established precedents protecting tool creators from user misconduct liability. These precedents could support the institute’s arguments about developer protections. The application of these principles to blockchain technology remains untested.

The Role of the Solana Policy Institute

The Solana Policy Institute operates as an independent non-profit research organization. It focuses specifically on blockchain policy issues across multiple jurisdictions. The institute employs legal experts, technologists, and policy researchers. Their work includes regulatory analysis, legislative drafting assistance, and educational initiatives. This specific proposal represents months of research and stakeholder consultation.

Institute representatives have engaged with SEC staff through formal comment processes. They have also participated in congressional hearings on digital asset regulation. Their technical expertise in blockchain architecture informs their policy recommendations. This expertise contributes to the credibility of their regulatory proposals.

Conclusion

The Solana Policy Institute’s request for SEC action represents a critical moment for DeFi regulation. Their proposal to exclude DeFi developers from broker regulations addresses fundamental questions about technology and finance. The custody-based framework offers a principled approach to distinguishing between different types of blockchain activities. This approach balances innovation with appropriate oversight.

Regulatory clarity benefits all ecosystem participants. Developers can innovate with understanding of legal boundaries. Investors gain clearer protections in decentralized systems. Regulators can focus enforcement resources appropriately. The coming months will reveal whether the SEC adopts these recommendations. Their decision will significantly shape the future of decentralized finance in the United States.

FAQs

Q1: What is the Solana Policy Institute?
The Solana Policy Institute is a non-profit research organization focused on blockchain policy. It conducts research, develops policy frameworks, and engages with regulators on cryptocurrency and DeFi regulation issues.

Q2: Why does the institute want DeFi developers excluded from broker regulations?
The institute argues that developers of non-custodial, open-source software do not function as financial intermediaries. They create tools that users operate independently, unlike traditional brokers who control customer assets and transactions.

Q3: What specific changes does the institute propose to SEC rules?
The proposal includes three main actions: publishing guidance distinguishing software from brokers, amending Rule 3b-16 to exclude open-source code from exchange definitions, and adopting a custody-based framework for regulation.

Q4: How would this affect current DeFi platforms and users?
Clear regulations would provide legal certainty for developers, potentially encouraging more innovation. Users might benefit from continued access to decentralized services with better-defined legal protections and operational transparency.

Q5: What happens if the SEC doesn’t adopt these recommendations?
Without clear distinctions, DeFi developers might face uncertain legal liability. This could discourage U.S.-based innovation and potentially push development to jurisdictions with clearer regulatory frameworks, reducing American competitiveness in blockchain technology.