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SEC Enforcement on Wonderland Threatens DeFi

Protocol Controlled Value is rare, and enforcement agents may be looking closely.

SEC Enforcement on Wonderland Threatens DeFi iBase Trading.
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Protocol Controlled Value is rare, and enforcement agents may be looking closely. Experts told CoinDesk that one of the oddest incidents in DeFi history may soon be one of the most legally significant. Recently occurring events may provide the SEC and other agencies a foothold in the $211 billion DeFi market.

ZachXBT discovered in late January that the treasury manager for popular DeFi protocol Wonderland was convicted felon Michael Patryn. He is the co-founder of fraudulent defunct Canadian cryptocurrency exchange QuadrigaCX.


Patryn and Wonderland founder Daniele Sestagalli were recognized for actively employing one of DeFi’s trendiest new tools: PCV. The Wonderland treasury presently manages approximately $700 million, down from a record of over $1 billion. Because PCV is generally handled centrally, it undermines DeFi’s claims to decentralization.

In contrast to some decentralized autonomous organizations (DAOs) that use on-chain governance and token-holder votes to directly fund disbursements. Others simply use token-holder votes as signals from the community to a centralized group of fund managers who may or may not choose to enact the community’s wishes.

While token holders supposedly owned Wonderland’s PCV, it was mostly controlled by the Sestagalli and Patryn utilizing merely a multi-signature mechanism for security. Patryn’s unmasking demonstrated why the sector should avoid centralized middlemen, pseudonymous or not. But, according to some legal experts, that may also be the SEC’s case.

To be clear, Collins Belton does not expect any regulatory action on PCVs. An agency examines the sector’s claims to decentralization to determine if they are securities instruments or vehicles pursuant to the Investment Company Act.

DAO is Only a Name

DeFi markets were frothy in late 2021, when Wonderland had more than $1 billion worth of PCV under Sestagalli and Patryn’s control. Belton says this trend of centrally-managed PCV is a sign of this froth.

Indeed, he said that the PCV trend has been called DeFi, even though it doesn’t live up to the name. These distinctions aren’t just a matter of ideology, though. They could be a focus for the SEC to crack down on.

It’s more likely that Wonderland’s TIME and wMEMO tokens could be classified as securities because Sestagalli was so vocal about managing the funds as a perk of the protocol.

A big problem for Sestagalli is that he didn’t tell anyone about Patryn’s identity because that might have caused some investors to change their minds about the company.

SEC Test Cases

It’s more likely that the The SEC will put a protocol’s claim of decentralization to the test against Wonderland to see if it holds up in practice, said Campbell. There are clear points of centralization and not enough information about them.

Indeed, the SEC has been threatening to take a more active role in the regulation of DeFi protocols over the last year, but so far, they haven’t taken any real action. This could be because of the legal mess that comes with decentralized decision making.

Numerous DeFi protocols, such Uniswap v2 and Aave v2, operate independently and are not upgradeable. This makes it hard for regulators to figure out what practical steps they can take to enforce them. This makes it hard for them to figure out what they can do.

Belton also stated that if a lawsuit went to higher courts, such as the Supreme Court, the current composition of the court is pro-business and pro-freedom. This could make it hard to get enforcement arguments against a more decentralized organization.

With autonomous and decentralized protocols, there are more people and steps for taking action against them.

SEC Establishes a Model

The SEC has already set a precedent when it comes to investment DAOs, which adds to the chances of them taking action.

The Securities and Exchange Commission (SEC) issued a DAO report in 2017. The report revealed that it had been looking into the initial coin offering (ICO) of the DAO, an early collective investment experiment that failed after a hack in 2016. The report also said that the SEC had been looking into DAO’s ICO.

In the DAO report, the SEC learns that PCV isn’t a novel name for structures the SEC already understands well. The SEC report states right away that those involved in the DAO may have violated federal securities laws.

For other protocols, especially those that establish and run treasuries centrally, like Ethereum, the SEC’s ability to enforce against Wonderland could be a positive sign.

If the industry loses, any way of soliciting and managing cash for the government might become an SEC target. This could happen over a long period of time with successful enforcements.


Many feel the SEC would not have intervened if DeFi users had asked for more decentralization from their projects. Investors generally have exit rights in DAOs with well-designed token holders and organizations, according to Campbell.

Self-regulation for DeFi has some real-world precedent, according to Casey Hewitt, creator of Hewitt Law. However, it might be hard to standardize any self-enforcement rules.

Establishment financial groups like the CME Group can do it, says Hewitt; so should a part of the crypto economy with $200 billion in assets be able to do it too.

It needs to do what she said if it wants to show that it can self-rule.

“The views and opinions on this Crypto News Website are solely those of the authors and contributors. These views and opinions do not necessarily represent those of iBaseTrading or its partners.”

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Jane De Leon is a news writer covering all things related to DeFi and NFTs. In the past, she has worked for a well-known Business Newspaper. She originally began investing in Bitcoin after hearing about it from her brother and hasn’t looked back since.