DeFi: Who, what and how to regulate in a borderless, code-governed world?

DeFi: Who, what and how to regulate in a borderless, code-governed world?

Boys and girls, hold on to your hats! It’s a new world, a financial system that is transparent and accessible 24 hours a days with a mobile phone or wallet. Julien Bouteloup told me this:

“In DeFi we are creating fully decentralised technology that is transparent and run by mathematics. That is the only way to beat it.”

He said, “We are building upon research papers, 40-years of research, and discrete mathematics, which is being built and put onto-chain that no other can beat. That is unbeatable. GitHub was not around in the ’90s. The first is that everything is open-source and everyone can contribute to the fact that we are moving at the speed light.

Similar: DeFi literacy: Universities embrace decentralized financial education

In August, Novum Insights reported that the DeFi market had grown by 40 factors since 2020. The total value of DeFi was approximately $61 billion, while the TVL is currently at $165 billion. The capitalization of stablecoins, which is an important component of DeFi, increased to $112 billion in the first half 2021.

DeFi investors are making huge gains, but they are also losing money. DeFi is not controlled, moderated or intermediated, hosted, validated by a central authority and only driven by smart contract. Consumers have no recourse if a smart contractual fails or is attacked. Loretta Joseph, global expert in digital asset regulation, told me that regulators protect investors and consumers. DeFi is completely P2P, as there are no intermediaries that can regulate it. It is up to you to decide how it will be regulated. Scammers will continue to be a problem. People will complain to regulators if they feel scammed.

Related: Crypto to regulation or regulation to adapt to crypto? Experts respond

DeFi protocols has lost $285 million to hacks since 2019. Experts stated that the majority of hacks occurred due to incompetent developers and coding errors. This is significant because the entire sector relies on code.

Related: Why updating the security protocols for blockchain is so important

Regulation: The challenges

Hester Peirce, U.S Securities and Exchange Commission, stated in February that DeFi would be challenging for her because the majority of regulation is done through intermediaries. But when you build something decentralized, there is no intermediary. It is great for the resilience of a system. It’s harder when we have to regulate the system to make it work.

The volatility of crypto markets is a concern, as opposed to government-backed fiat currencies, the risk for money laundering and terrorist financing and the unregulated nature and absence of recourse in the event of financial losses. Nonfungible tokens explode, creating excitement, confusion and legal questions as well as massive gains. NFT markets also attract large crypto transactions. This will likely trouble regulators who might view the big money moves on NFTs to be money laundering. Regulators face additional challenges at a macro-level due to the decentralization in the financial system, as well as the ability to manage the economy and protect consumer interest.

Similar: Legal perspective on nonfungible tokens

As a way to transfer cryptocurrencies across multiple blockchains, DeFi decentralized autonomous organisations (DAOs), are very popular. This allows for crypto lending and yield farming. DAOs are responsible for overseeing more than $543 million, according to conservative estimates. Information technology governance and corporate governance can be combined in a DAO. Smart contracts are used to govern and operate the organization. These smart contracts are controlled and enforced using algorithms. The code executes as well as governs. Who is responsible if the algorithms fail?

A group of researchers has published a joint article titled “Regulating Blockchain and DLT: A Technology Regulator’s Perspective”. It outlines some key points. (1) The importance of identifying central points that can be used for regulation, such as core software developers, miners, and end users. These researchers also raise the possibility that regulatory or government players could be participants. (2) The issue of liability — could core developers be held accountable? (3) The challenges associated with smart contracts’ immutability and inability to be updated; and (4) the importance of technology audit and quality assurance processes.

Regulators will likely be focused on wallet providers and exchanges. Decentralized exchanges enable users to trade directly from wallets, in a direct P2P fashion without intermediaries. The Financial Action Task Force (FATF), a global money-laundering watchdog, has exchanges in its sights. Christopher Harding, chief compliance officer at Civic, stated that the FATF had provided guidelines that suggested that DApps would need to adhere to country-specific laws enforcing FATF and AML requirements.

Similar: FATF draft guidance targets DeFi compliance

The London School of Economics and Political Science recently reviewed 16 major exchange platforms and found that only four of them were subject to significant regulation in relation to trading. To be listed on any major exchange, a project must have passed auditing. But that’s not the end of security. Toby Lewis, CEO at Novum Insights made this point:

Smart contracts can also be attacked. It doesn’t mean that they will not be exploitable, even if they have been audited. Before you begin, do your research.

It is difficult to find the right time to regulate in an open-source environment, where projects are growing at an average compound rate of 20% per annum. This is why it is so important to identify the problem. Some governments have attempted to achieve this balance using regulatory sandboxes (U.K. Bermuda, India South Korea, Mauritius and Australia), while others have gone straight into legislating (San Marino Bermuda, Malta, Liechtenstein).

Leading DeFi figures are not resisting regulation. They embrace it as part the industry’s maturing. Stani Kulechov (founder of DeFi lending platform Aave) said that peer review is the future. “Auditors don’t guarantee security, they merely help to spot something the team wasn’t aware.” It will eventually be about peer review, and we need community incentives to empower security experts into this space.” Emeliano Bonassi also spoke about ReviewsDAO which is a peer review forum that connects security experts with projects seeking reviews. Bonassi believes that this could be a learning opportunity for people with specialized knowledge to contribute to the improvement of the security ecosystem.

Tan Tran, Vemanti Group CEO, stated: “I see an accelerated adoption platform with permissionless financial products that can be used anywhere. However, each one will be governed and controlled by a regulated party with centralized control to ensure accountability, compliance, and transparency. This isn’t about stopping innovation. It’s about deterring bad actors exploiting unsophisticated customers.” Brendan Blumer, CEO at, stated that the real winners in the digital age will be those who think long-term, and take the time necessary to ensure their products comply with professional and jurisdictional requirements.

It is clear that regulators could be interested in software developers and exchanges. We expect regulators to look for ways in which they can improve technology quality assurance and DeFi governance. This is possible only when the industry partners with them. Mark Taylor stressed that regulators must continue to work with the crypto industry players in order to protect consumers.

Julien Bouteluop explained that DeFi is actually building everything traditional finance has but it’s faster, stronger and more transparent. It also makes it easier for everyone to access it. It’s truly different. This means that everyone can have access to technology around the globe and does not need permission. It’s important to encourage innovation and build a better world.

In this global 24/7, borderless market, who, what, and how should we regulate? This is a new game. Industry and regulators will have to work together.

These views, thoughts, and opinions are solely the author’s and do not necessarily reflect the views or opinions of Cointelegraph.
Jane Thomason is an expert on blockchain and social impact. She is a graduate of the University of Queensland. She’s held multiple roles in the British Blockchain & Frontier Technologies Association and the Kerala Blockchain Academy. She is the author of numerous articles and books on Blockchain. She was featured in Crypto Curry Club’s Top 100 Women Crypto, Decade of Women Collaboratory’s Top 10 Digital Frontier Women, Lattice’s Top 100 Fintech Influencers For SDGs, Lattice’s Top 100 Digital Frontier Women, Lattice’s Top 100 Fintech Women for SDGs, Thinkers360’s Top 50 Global Thought Leaderships and Influencers On Blockchain.

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Amy Jimenez– Services My name is Amy Jimenez, and I am the main writer behind the"" for the ground-breaking and most fragile bits of knowledge into the most recent news in the services sector. I began my voyage of work as an autonomous investment advisor. I had around 4 years of involvement in this field. I am a free soul so; my energy for investigating the world has taken me to the countries over the globe and allowed me to report for a part of the best news affiliations. At present, I am a full-time manager as experienced in the account and began to utilize my capacities.

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