Regulated Defi: The Next Big Thing for Defi Projects

    TheMorningCrypto Desk
    TheMorningCrypto Desk
    Published on November 7, 2022 11:34 AM

    Updated on January 9, 2023 12:51 PM

    China has effectively prohibited the use of DeFi and private digital assets, and Russia is deciding whether to follow suit.
    Regulated Defi: The Next Big Thing for Defi Projects
    Source: unsplash

    Decentralized finance (DeFi), one of the fastest-increasing ecosystems in the cryptocurrency industry, has long been a source of concern for regulators due to the space's decentralized structure.

    In 2022, US regulators devoted special attention to the emerging field, with a particular emphasis on terminating the ecosystem's anonymity.

    Risks on Defi Projects

    Defi has long been a subject of concern for the government as more and more projects are imbibing into the field. Numerous projects have been built on the Defi frameworks to enhance and optimise the company’s services, data, transactions etc. 

    In June, a draft bill from the United States was leaked, revealing some of the significant areas of concern for regulators, including DeFi stablecoins, DAOs, and crypto exchanges. The proposed bill placed a strong emphasis on user protection, with the goal of eliminating any anonymous initiatives. The measure mandates any crypto platform or service provider, whether a DAO or DeFi protocol, to officially register in the United States.

    Another draft paper from the United States According to a statement issued by the Federal Reserve Board in August, even though DeFi products account for a small portion of the global financial system, they may pose threats to financial stability. According to the paper, DeFi's aversion to censorship is exaggerated, and transparency might be a competitive disadvantage for institutional investors as well as an encouragement to misconduct.

    Related: Commodity Regulators Targeting DeFi for Its Decentralised Features

    Unstable Defi Framework

    Regulators' worries for user safety are justified, but experts argue that this should not come at the expense of innovation and growth. If the focus is just on gathering data and erecting barriers to the invention, the United States will fall behind in the battle for innovation.

    Hugo Volz Oliveira, secretary of the New Economy Institute, a non-profit focused on providing digital economy policy proposals, said:

    “Consider how legislators and authorities continue to insist on the abolition of anonymous crypto projects and teams, thereby choking this industry by attacking its architects. However, this will not be possible in the more sophisticated projects being constructed in accordance with the community's concept.”

    He also stated that one of the possible threats would be the upcoming new DeFi projects would be drifted away due to instability. 

    The Lack of Domain Knowledge

    A fresh proposal presented earlier this year by the United States Securities and Exchange Commission (SEC) revealed the SEC's lack of expertise in the industry. The proposal seeks to alter the Securities Exchange Act of 1934's definition of "exchange." All platforms with a specific transaction volume would be required to register as exchanges under the legislation.

    The numerous recommendations and cautions issued by government authorities in the United States reflect a harsh approach, which many experts feel would fail.

    And a Fail is directly related to the failure of new budding Defi projects.

    The maturing web3 sector will take a lot of time before it could switch places with the traditional system. Although many institutions and government nationals are behind the Defi ecosystem to boost its usage to address problems, others just want to make the Defi run according to them.