SEC Signs Deal To Investigate DeFi Transactions

Blockchain analytics firm AnChain.AI has signed a deal with the U.S. Securities and Exchange Commission (SEC) to help monitor and regulate the turbulent decentralized finance (DeFi) industry, according to a company spokesperson. The initial value of the contract is $125,000, with five separate one-year $125,000 option years for a total of $625,000.

According to CEO and co-founder Victor Fang, “The SEC is very keen on understanding what is happening in the world of smart contract-based digital assets…so we are providing them with technology to analyze and trace smart contracts.”

AnChain.AI is a San Jose-based artificial intelligence and machine learning blockchain startup that focuses on tracking illicit activity across crypto exchanges, DeFi protocols, and traditional financial institutions. In revealing the SEC contract, which started in May 2021, the company also announced today a $10 million Series A round of funding led by an affiliate of Susquehanna Group, SIG Asia Investments LLP, at an undisclosed valuation.

The deal comes on the heels of the SEC taking further interest in DeFi as it rapidly matures and grows in size. The industry currently manages more than $82 billion, and the largest decentralized exchange, Uniswap, processed over $1.8 billion worth of transactions in the last 24 hours, many of which included tokens that could be determined to be securities by the SEC.

Additionally, these platforms are becoming increasingly complex. Fang noted that the Uniswap platform is actually an amalgam of 30,000 separate smart contracts that execute the actual exchange of tokens.

The SEC’s first major action against the DeFi space came in 2018, when it shut down EtherDelta, a ‘DeFi’ exchange that it deemed to be operating illegally.

In an August interview with The Wall Street Journal, SEC Chairman Gary Gensler warned that DeFi operations are not immune from oversight because they use the word decentralized, and that “There’s still a core group of folks that are not only writing the software, like the open source software, but they often have governance and fees…There’s some incentive structure for those promoters and sponsors in the middle of this.”

SEC Commissioner Hester Peirce echoed this sentiment in a March interview with Forbes, but perhaps in an acknowledgement of the potential in DeFi asked these projects to come forward and be pro-active with the regulator, “When you start to look at the tokens themselves and try to figure out whether they’re securities, it does get kind of confusing.

In particular, it’s so hard in the DeFi landscape because there’s such variety. This is why I encourage individual projects to come in and talk to the SEC because it really does require a look at the very particular facts and circumstances.”

In addition to cataloguing and monitoring known wallets tied to illicit actors, AnChain.AI has built a predictive engine that can be used to identify unknown addresses and transactions that could be suspicious. This is all part of Fang’s goal to move beyond doing “post-incident investigations” to move the “defense all the way up to the upstream” and make it “preventive”.

Aside from government clients, AnChain.AI’s technology is also being used by centralized cryptocurrency exchanges and traditional financial institutions. In a press release, Ye Li, Investment Manager at SIG said of the investment, “AnChain.AI has made great progress in developing its market-leading crypto security technology to meet its customers’ broad demand in regulatory compliance and transaction intelligence.”

The SEC declined to comment.

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I am director of research for digital assets at Forbes. I was recently the Social Media/Copy Lead at Kraken, a cryptocurrency exchange based in the United States.

Source: SEC Signs Deal To Investigate DeFi Transactions

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