US regulators are scratching their heads with regards to what to make of the multibillion emerging market, but there’s a positive sign for the space.
DeFi is rising, the regulators are talking
A Monday meeting between members of the Commodity Futures Trading Commission saw discussion of the rise of DeFi applications and use cases as the crypto sub-sector surges to a nearly $19 billion total valuation, as per CryptoSlate’s data page.
Released for public viewing today, the committee’s Technology Advisory division explored the pros and cons of DeFi apps in addition to devising penalties against “rogue” devs or legal provisions to help investors piling into the space.
Dubbed the “The Growth and Regulatory Challenges of Decentralized Finance,” law professor Aaron Wright and attorney Gary DeWaal took part in the discussion. They briefly described the operation of decentralized exchange protocol Uniswap, with regards to how users provide liquidity, run trading pairs, and earn a portion of fees from the trades conducted on the platform.
An essential takeaway from the meeting, for regulators and crypto users both, was that the lawmakers noted DeFi apps opened the floodgates to financial inclusivity and allowed every retail user to take part in the protocol’s functions without meeting any predetermined criteria.
Wright, in particular, discussed that such software helped provide greater financial flexibility:
“An interesting benefit of decentralized financial projects is that they’re composable and interactible. Developers often describe them as financial Lego blocks.”
But nothing’s without risk
Despite the benefits and positives that DeFi apps presented, the lawmakers pointed out legal considerations, in specific, were mostly overseen by DeFi builders and developers. “These contracts are alegal. That doesn’t mean that they are illegal. It means they are designed at a technical level, not necessarily with regulatory compliance in mind,” said Wright.
DeWaal suggested that most fintech innovations in the US were subject to strict legal guidelines and regulations, ones that DeFi apps have, so far, failed to duly follow.
Apart from legal issues, the regulators said the level of technological sophistication—such as setting up a smart contract, handling assets online, and participating in liquidity mining—required by such developments was of a high level. This, potentially, made DeFi a bit more challenging than more popular crypto tools, they said.
Meanwhile, DeWall said that the DeFi industry was a “gamechanger” for new-age tech with the right regulations in place. “It has lots of potential benefits but has a lot of risks. We don’t want to inhibit this important development,” he noted.
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