Should DeFi Projects Be Subject to Regulations?

The Decentralized Finance (DeFi) space is so vibrant that it’s hard to grasp the longevity of its applications. According to statistics from coinmarketcap, the market cap of DeFi is over $112bn. For that, financial watchdogs are having a hard time keeping up with such an explosive industry. Just recently, a hacker managed to scoop up to $600 of crypto from the Poly network. Such a security breach has ignited talks on whether regulators should be more involved in overseeing the operations in the sector or let things play out. 

It’s Not a Clear Cut Answer

Every government around the world seems dumbfounded with handling DeFi. Heck, regulations on the older, broader crypto world are anything but conclusive.

Some countries have imposed sweeping regulations governing blockchain technology as a whole. Others have tried to govern a few more sensitive portions of DeFi while leaving the rest free. In some, regulations are still on the drawing books. 

In contrast, many countries do not understand crypto in reality. Nonetheless, the EU, US, and Chinese have developed a framework to regulate cryptocurrencies.

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The European Union Approach

Within the EU common market, regulations for DeFi are separate from other cryptos. The Markets in Crypto Assets(MiCA) has the authority to draft regulations on DeFi. 

The lack of intermediaries to regulate, like banks in centralized financial systems, poses a big challenge. Hence, there are currently no specific regulations governing DeFi within this multinational organization. 

Similar Problem in the US

The problem of who or what to regulate has also puzzled US regulators. DeFi is generally a peer-to-peer coding based on smart contracts, so regulating the body is an issue.

Even so, it is wrong to say that there aren’t any attempts to pass regulatory rulings. The US Securities Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have done so. Both bodies took enforcement action for law violations against Abra.

Scrutiny is also possible from the Treasury’s Financial Crimes Enforcement Networks (FinCEN). The argument is that DeFi allows the transmission or exchange of virtual currency. The aim is to ensure regulatory and registration compliance targeting non-US DeFi platforms. Not much, yet, has been enforced on such scrutiny to date.

Sweeping Regulations in China

The Chinese government has taken a completely different approach. Chinese financial watchdogs consider regulations on DeFi similarly to those on crypto or blockchain technology instruments. It is a more straightforward approach, but it somewhat sounds harsh.

Unfortunately, easier doesn’t mean better. Anything that is by any means associated or related to cryptos and blockchain faces in China. The ban has one key exception, the CCP’s Digital Yuan. Yet, many are not sure if it is crypto. Every key aspect of it is shroud in secrecy and centralization.

DeFi Deserves an Exception

According to observations by EU bodies, it isn’t easy to regulate crypto. A major problem for regulators lies in determining who or what they want to regulate. 

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DeFi links clients directly without intermediaries. As such, any regulations will be attempts at controlling transactions. There aren’t any intermediaries that could exploit transacting parties. So, DeFi should somehow remain exempted from regulatory red tapes.