Regulators scratch their heads over how to get at DeFi

Decentralised Finance is revolutionising the world of yield in the crypto/blockchain space, and it is enabling investors to get a massively better return than in the traditional finance sector. However, regulators have their eyes on it and are furiously thinking how to deal with protocols that don’t have a centralised control. 

Gary Gensler called it the “Wild West” of crypto. He also expressed a desire to see “middle men” inserted between the DeFi platforms and the investors wishing to transact with them, for the reason of protecting a “vulnerable” public. 

It’s not clear how any sort of broker could be placed into a decentralised set-up – by definition it would no longer be decentralised. Also, a middle man would require his slice of the pie, to the detriment of the investor. 

Nobody can deny though that some kind of regulation may be necessary in the DeFi space. Hardly a week goes by without some platform’s developers ‘rug-pulling’ on their investors. 

However, value continues to pour into the sector and to be locked up in staking contracts. According to Defi Llama, the amount of total value locked (TVL) in the DeFi protocols across all the major blockchains is currently $256.5 billion. This amounts to a more than 12x since the beginning of the year. 

No wonder regulators are worried. If this is allowed to continue then banks, savings accounts, and other traditional financial entities will be going out of business – and soon. 

The problem the regulators have is that besides going after the odd few bad actors in the space, the most part of DeFi is extremely legitimate. Incredibly bright minds have turned the sector into one of the most innovative on earth, and it is making banks obsolete by the second. 

Should the law-makers start applying the heavy-handed regulations that they have been speaking about, then there is bound to be much push-back from the sector, and even more decentralisation as platform founders and developers cut their protocols loose, thereby taking away any focal point of attack for regulators. 

According to an article earlier today on CNBC: 

“acting U.S. Comptroller of the Currency Michael Hsu likened DeFi activity to controversial practices in Wall Street that led up to the 2008 financial crisis.” 

It might well be argued that “controversial practices” are only thus if you are the one that finds them controversial. Wall Street, and its practices have been the very epitome of controversiality over many decades, and it’s just these very kinds of practices that DeFi and blockchain transparency and immutability are currently disrupting. 

Gensler and crew will scratch their heads all they like, but no amount of huffing and puffing will blow the DeFi house down. Everyone knows that the incumbent financial system is teetering on the brink, so it’s just as well that we have an immeasurably better system waiting in the wings. 

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.