Regulators are starting to struggle with DeFi

On private video calls last week, some of the world’s fastest-growing cryptocurrency start-ups have educated global financial regulators on a market corner that has largely eluded surveillance: the growing world of cryptocurrencies decentralized finance.

The event featured presentations from the Uniswap decentralized exchange and dYdX derivatives trading venue, among other popular so-called DeFi programs, according to people familiar with the conference.

Representatives of the Securities and Exchange Commission and the Securities and Exchange Commission participated in the event, which was hosted by the International Securities and Exchange Commission, the people said.

The meeting, which has not been reported before, shows that financial regulators have begun to pay more attention to DeFi, a collection of cryptocurrency projects that aims to cut down on intermediaries and provide financial services such as lending and Marketing using automated software programs.

Lawyers and cryptocurrency advocates have said that the rapid growth of DeFi in the last year had taken the authorities into fury, while raising unprecedented questions about the nature of financial regulation.

Bitcoin is the highest endeavor to bypass traditional financial systems but the so-called DeFi sector 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 split programs such as raising “a number of challenges” for investors and regulators.

“It’s happening so fast that regulators can’t respond, as a matter of practice,” said Lewis Cohen, a colleague of DLx Law, a cryptocurrency law firm.

Cohen compared the boom in DeFi to a “giant DDoS attack on global financial regulation,” referring to a sort of cyber security assault where hackers overwhelmed their targets with huge volumes of activity.

A spokesman for Iosco declined to comment on the event, saying it had been 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 against the first rules

While employees of DeFi projects have said they will accept clearer guidance from regulators, greater oversight could pose an existential threat to the growing sector, which has ambitions to create a completely new financial system.

Regulators have traditionally monitored business activity through intermediaries such as banks, and may decide that the decentralized nature of DeFi applications makes the sector unacceptable.

The founders of some of the largest projects, such as Uniswap, have begun to introduce governance systems that aim to spread responsibility for applications among their users, rather than with a central authority.

Many projects have also distributed tokens that have increased in value over the past year, raising concerns that regulators might classify them as securities and introduce greater oversight.

Total assets engaged as the warranty on DeFi applications is increased in the past year, it has grown from less than $ 2bn to more than $ 50bn, according to data collected by DeFi Pulse.

Cryptocurrency advocates have resists the first attempts to regulate the underlying software programs, arguing that open-source projects are protected speeches

“If you’re trying to implement regulations based on authorization and permit bases on these activities, what you’re doing in the background is creating a ban on certain types of discourse,” said Peter Van Valkenburgh, director of research in Coin Center, a defense group.

A first focus point has emerged around the new guidelines developed by the Financial Action Task Force, an intergovernmental organization that develops standards to prevent money laundering worldwide.

A project version of the newest group guide appeared to broaden the definition of the group of “virtual asset service providers” to include decentralized software programs.

Cryptocurrency groups have protested against the measures, which could force DeFi applications to begin implementing your customers ’knowledge rules similar to those required by banks, and FATF said Friday that it would delay the last guide. until October.

U.S. regulators have not yet taken firm action

U.S. regulators have also taken notice. Berkovitz, the CFTC commissioner, said in a recent statement speech that automated software programs for derivatives trading appeared to violate the Commodity Exchange Act, which requires futures contracts to be exchanged through regulated agencies and bar individuals with less than $ 10 million in assets invested by entering into contracts. in swap.

“I’m totally open to having certain applications that can be done more effectively without intermediaries,” Berkovitz said in an interview. “But intermediaries in many respects serve an important role, and we can hold them accountable.”

Berkovitz’s comments suggested that the CFTC could begin regulating DeFi applications if they began to replicate traditional derivatives markets. So far, however, the CFTC and the SEC have not taken any concrete action against DeFi.

“If there were to be an unregulated direct competitor in the futures market, this would be problematic,” Berkovitz said.

The founders of the DeFi project claim that users of its open-source software programs benefit from transparent systems based on the rules for executing transactions.

For the SEC to take action against DeFi, it would need to assert “securities jurisdiction” over the programs and their related digital assets, said Michelle Bond, head of the Association for Digital Asset Markets, a organ of the cryptocurrency industry.

“As a doctor should not recommend cardiac surgery for a knee brace, the regulations of a class or platform of goods should not be widely applied to classes or technologies of similar goods,” Bond said.

Antonio Juliano, founder of dYdX, said the project had several discussions with the CFTC, and its so-called perpetual contracts were not even available for trading in the United States largely for regulatory reasons.

“A lot of things that had to be done manually before, don’t need to be done anymore,” Juliano said. “It’s good for investors.”