Regulators begin to struggle with DeFi
In private video calls last week, some of the world’s fastest growing cryptocurrency startups trained global financial regulators on a corner of the market that has largely escaped scrutiny: the world in full swing. boom in decentralized finance.
The event included presentations from the decentralized exchange Uniswap and the dYdX derivatives trading platform, among other popular so-called DeFi programs, according to people familiar with the conference.
Representatives from the Commodity Futures Trading Commission and the Securities and Exchange Commission also attended the event, which was hosted by the International Organization of Securities Commissions, the people said.
The rally, which was not previously reported, shows how financial regulators have started to pay more attention to DeFi, a set of cryptocurrency projects that aims to cut out middlemen and provide financial services such as lending and trading using automated software.
Cryptocurrency lawyers and advocates have said DeFi’s rapid growth over the past year has caught authorities off guard, while raising unprecedented questions about the nature of financial regulation.
Bitcoin is the most publicized effort to bypass traditional financial systems, but the so-called DeFi industry extends far beyond cryptocurrencies into insurance, derivatives trading, and even savings accounts.
In the United States, CFTC Commissioner Dan Berkovitz has suggested that many DeFi apps may be illegal, and SEC Chairman Gary Gensler has distinguished the programs as raising “a number of challenges” for investors and regulators.
“There is so much going on so quickly that regulators simply cannot respond, in practice,” said Lewis Cohen, partner at DLx Law, a cryptocurrency law firm.
Cohen likened DeFi’s boom to a “giant DDoS attack on global financial regulation,” referring to a sort of cybersecurity attack where hackers overwhelm their targets with huge volumes of activity.
An Iosco representative declined to comment on the event, saying it was organized to “support internal work.” The CFTC confirmed the agency’s presence but declined to comment on the discussions. Uniswap, dYdX and the SEC declined to comment.
DeFi apps push back the first rules
While employees on DeFi projects have said they would welcome clearer guidance from regulators, increased oversight could pose an existential threat to the growing industry, which aspires to create a whole new financial system.
Regulators have traditionally monitored activity going through intermediaries such as banks, and may decide that the decentralized nature of DeFi applications makes the industry irresponsible.
The founders of some of the larger projects, such as Uniswap, have begun to introduce governance systems that aim to distribute responsibility for applications among their users, rather than with a central authority.
Several projects have also distributed tokens that have grown in value over the past year, raising concerns that regulators may classify them as securities and introduce more oversight.
Total assets pledged as collateral in DeFi apps have skyrocketed over the past year, from less than $ 2 billion to over $ 50 billion, according to data collected by DeFi Pulse.
Supporters of cryptocurrency have resisted the first attempts to regulate the underlying software programs, arguing that open source projects are protected speeches.
“If you try to impose prior restrictions and authorization-based regulations on these activities, you are essentially creating a ban on certain types of speech,” said Peter Van Valkenburgh, director of research at the Coin Center, a group defense of rights.
A first flashpoint has emerged around new guidelines developed by the Financial Action Task Force, an intergovernmental organization that develops standards to prevent money laundering on a global scale.
Cryptocurrency groups protested the measures, which could force DeFi apps to start implementing KYC rules similar to those required of banks, and the FATF said on Friday it would postpone final guidelines. until October.
US regulators have yet to take firm action
US regulators have also taken note. Berkovitz, the commissioner of the CFTC, said in a recent word that automated software programs for trading derivatives appeared to violate the commodity exchange law, which requires futures contracts to be traded through regulated bodies and prohibits people with less than $ 10 million of invested assets to enter into swap contracts.
“I am totally open to the idea that some applications can be handled more efficiently without intermediaries,” Berkovitz said in an interview. “But intermediaries in many ways perform an important function, and we can hold them accountable.”
Berkovitz’s comments suggest that the CFTC could start regulating DeFi apps if they start to replicate traditional derivatives markets. So far, however, the CFTC and SEC have taken no concrete action against DeFi.
“If it were to be an unregulated direct competitor in the futures market, that would be problematic,” Berkovitz said.
The founders of the DeFi project argued that users of their open source software benefit from transparent, rule-based systems for executing transactions.
In order for the SEC to take action against DeFi, it would need to assert “securities jurisdiction” over the programs and their associated digital assets, said Michelle Bond, chief executive of the Association for Digital Asset Markets, an organization in the United States. cryptocurrency sector.
“Just as a doctor shouldn’t recommend heart surgery for a knee scrape, regulations of one asset class or platform shouldn’t be broadly applied to non-asset classes or technologies. similar, ”Bond said.
Antonio Juliano, founder of dYdX, said the project had had multiple discussions with the CFTC and its so-called perpetual contracts were not yet available for negotiation in the United States, largely for regulatory reasons.
“A lot of things that had to be done manually before, don’t have to be done anymore,” said Juliano. “It’s great for investors. “