DeFi Sunday: An industry that poses a major challenge for regulators

The battle for regulation of the DeFi sector is being waged by the US SEC

The cryptocurrency sector also brings various risks to the market, which, in addition to investors, regulators also have to deal with. This was stated by the chairman of the American SEC, Gary Gensler, and he also pointed out the problem associated with the high volatility of this market. Tighter regulation would, in particular, protect investors and suggest that they provide protection against scams and market manipulation. At the same time, these are the same reasons that the SEC bases on rejecting Bitcoin exchange fund (ETF) applications.

The total market cap of cryptocurrencies is attacking the $ 2 trillion threshold, after losing up to a third of its value recently after a bigger price drop. Bitcoin is also increasingly appearing in the mainstream media, with more than 80 cryptocurrencies on the market with a market cap of more than $ 1 billion and more than 1,500 cryptocurrencies with a market cap of over $ 1 million.

DeFi representatives point to the fact that we are trying to regulate this industry through laws that are intended for a completely different world

However, many lawyers of DeFi companies rightly ask why regulators are trying to apply the rules for centralized finance to a world where the only intermediaries are codes. It is relatively difficult for regulators to keep up with the innovations of the cryptocurrency world and therefore often try to make use of existing regulatory frameworks. Another problem is that there is practically no general interest in the uniform management of cryptocurrency regulations and especially in the DeFi sector.

In addition, decentralized finances exists in absolute contrast to the current financial system , in which credible managers are needed to manage money. Of course, they do not exist in DeFi and everything is controlled only by pre-set (programmed) protocols. Many creators of these protocols even choose the path of the anonymous creator of Bitcoin, do the so-called "Satoshi move" and their platforms and protocols runs completely independently, without any administrator.

The current regulations are set to control intermediaries and their application to DeFi is completely impossible to the current extent. If there is no intermediary to hold your assets, trade on your behalf, or manage your personal information, there is no one you can prosecute in the event of a mistake or scam. This is where we get to the root of the matter. In the case of cryptocurrencies, everyone is the only administrator of their property and should therefore do also control over the entities to whom they entrust their funds.

The global crypto community is also coming into play here, trying to carry out this "supervision" for a long time and drawing attention to scammy projects almost constantly. DeFi could thus be a sector that regulates itself in some way through the market. According to experts, this could be a much better solution than trying to adapt regulatory frameworks, which are in principle intended for a diametrically different sector.

Either the regulations change or the DeFi will move where it suits them better

Leading lawyers of large DeFi companies have an extreme problem applying regulations to the protocols they represent. They often find themselves in a situation where they find that it is completely impossible. Regulations literally require them to forcefully insert an intermediary in the form of a code, or a human factor, into a fully decentralized process. Proponents of cryptocurrencies fight this process with all their can, but forced-centralization cannot be considered a suitable path to a safer DeFi sector.

As in any other industry, DeFi will certainly find individuals and companies whose interests cannot be considered pure. Regulators should therefore work with the crypto industry to jointly develop new regulatory frameworks that reap the benefits of a decentralized system. If this does not happen, development is likely to shift from the US to other jurisdictions that will suit DeFi companies. At the same time, the US would not get rid of this problem anyway, as DeFi protocols do not follow state borders and investors could continue to use them.