Solana Policy Institute Demands SEC Exclude DeFi Developers From Crippling Broker Regulations

WASHINGTON, D.C. – May 15, 2025 – In a pivotal move for the decentralized finance sector, the Solana Policy Institute has formally urged the U.S. Securities and Exchange Commission to establish clear regulatory distinctions that would exclude DeFi developers from traditional broker regulations. This request highlights a growing and critical debate about how to govern blockchain-based financial tools without stifling their foundational innovation.

Solana Policy Institute Challenges SEC Regulatory Framework

The non-profit Solana Policy Institute submitted detailed commentary to the SEC this week. Consequently, the institute argues that applying existing broker-dealer rules to developers of non-custodial, open-source software represents a fundamental category error. Moreover, this approach could inadvertently criminalize routine software development. The institute’s filing states that such regulation would contradict the core principles of decentralization. Therefore, they advocate for a new, nuanced framework.

Specifically, the institute calls for three concrete actions from the regulatory body. First, it requests the publication of formal guidance separating non-custodial software from broker transactions. Second, it seeks an amendment to Rule 3b-16 under the Securities Exchange Act. This amendment would explicitly exclude open-source code from the legal definition of an “exchange.” Finally, it proposes the adoption of a custody-and-control-based test. This test would differentiate intermediary activities from non-intermediary blockchain operations.

The Centralized vs. Decentralized Finance Divide

This regulatory push centers on a crucial distinction often blurred in policy discussions. Centralized exchanges (CEXs) like Coinbase or Binance act as traditional financial intermediaries. They hold customer funds, execute trades on their own order books, and exercise significant control. In contrast, decentralized finance (DeFi) protocols are typically non-custodial. They provide software that allows users to interact peer-to-peer, with the developers having no ongoing control over assets or transactions after deployment.

Centralized Exchange (CEX): Custodian of user funds, operates a proprietary order book, acts as a clear intermediary, and is subject to traditional financial regulations.
Decentralized Finance (DeFi) Protocol: Provides non-custodial, open-source software, facilitates peer-to-peer interactions, developers lack post-deployment control, and represents a novel technological tool.

Regulating these two under the same “broker” umbrella, the institute contends, is akin to holding the inventor of email responsible for all communications sent through the protocol. This analogy underscores the perceived overreach of current regulatory interpretations.

Historical Context and Regulatory Pressure

The SEC’s increased scrutiny of the crypto space has been a multi-year narrative. Landmark cases and enforcement actions against entities like Ripple and various initial coin offerings have set precedents. However, the DeFi sector presents a unique challenge. Unlike an ICO where a central entity raises funds, many DeFi protocols are governed by decentralized autonomous organizations (DAOs) or have no controlling entity at all.

Previous SEC guidance and speeches have hinted at a focus on the “economic reality” of transactions rather than their technological packaging. This has created significant uncertainty for developers. Many fear that writing certain types of open-source smart contract code could inadvertently place them in the SEC’s crosshairs. The Solana Policy Institute’s proposal aims to replace this uncertainty with clear, code-based legal boundaries.

Potential Impact on Innovation and the U.S. Tech Landscape

The implications of this regulatory debate extend far beyond compliance paperwork. A restrictive approach that classifies DeFi developers as brokers could have a chilling effect on open-source blockchain development within the United States. Developers and entrepreneurs might relocate to jurisdictions with clearer or more favorable regulations. This exodus would result in a significant “brain drain” and could cede technological leadership in a critical emerging field.

Conversely, a tailored framework could foster responsible innovation. It would provide legal clarity, allowing U.S.-based developers to build with confidence. Furthermore, it would protect users by ensuring that truly custodial and intermediary services face appropriate oversight, while non-custodial toolmakers can operate without the burden of inappropriate licensing. This balance is seen as essential for maintaining the country’s competitive edge in financial technology.

Expert Perspectives on the Proposal

Legal scholars specializing in blockchain technology have noted the sophistication of the custody-and-control argument. “The law has long used custody as a trigger for fiduciary duties and regulatory obligations,” noted one academic cited in the institute’s filing. “Applying that established principle to the digital asset world is a more coherent approach than trying to fit software into 80-year-old definitions of a ‘broker.'”

Industry advocates echo this sentiment. They argue that the SEC’s current stance risks punishing innovation for its novelty rather than addressing genuine consumer risks, which largely stem from centralized platform failures, fraud, or opaque operations—issues that DeFi’s transparent, on-chain nature can potentially mitigate.

Conclusion

The Solana Policy Institute’s formal request to the SEC marks a significant moment in the ongoing evolution of cryptocurrency regulation. By urging the commission to exclude DeFi developers from broker regulations, the institute advocates for a regulatory paradigm that recognizes the technical and philosophical distinctions between centralized and decentralized systems. The outcome of this debate will profoundly influence whether the United States becomes a hub for responsible blockchain innovation or a jurisdiction from which its builders feel compelled to flee. The call for a custody-based framework offers a potential path forward that balances consumer protection with the preservation of foundational software development freedoms.

FAQs

Q1: What is the Solana Policy Institute?
The Solana Policy Institute is a non-profit research and advocacy organization focused on developing sensible, innovation-friendly public policy for blockchain technology and the Solana ecosystem.

Q2: What specific SEC rule does the institute want amended?
The institute is calling for an amendment to SEC Rule 3b-16, which defines an “exchange,” to explicitly exclude open-source software code from that definition.

Q3: How does “non-custodial” software differ from a broker?
Non-custodial software never takes control of user assets; it simply provides a tool for users to transact with each other. A broker, in contrast, holds customer funds and securities and acts as an intermediary in transactions.

Q4: Why is this considered a critical issue for developers?
If DeFi developers are regulated as brokers, they would need to obtain complex, expensive licenses, comply with extensive reporting rules, and potentially be liable for user transactions—a standard impossible for creators of open-source, autonomous code to meet.

Q5: What is a “custody-and-control-based framework”?
This is a proposed legal test where regulatory obligations are triggered only if an entity has actual custody or ongoing control over user assets, rather than merely publishing software that others use to manage their own assets.

Solana Policy Institute Demands SEC Exclude DeFi Developers from Crippling Broker Regulations