In a private video call last week, some of the world’s fastest-growing cryptocurrency startups introduced to global financial regulators a corner of the market that largely evades regulation: the booming world of decentralized finance.
According to people familiar with the matter, the event features presentations from the decentralized exchange Uniswap and derivatives trading venue dYdX, as well as other popular so-called DeFi programs.
People familiar with the matter said that representatives of the Commodity Futures Trading Commission and the Securities and Exchange Commission also participated in activities organized by the International Securities Regulatory Commission.
This gathering has not been reported before, which shows how financial regulators have begun to pay more attention to DeFi, a collection of cryptocurrency projects that aims to eliminate middlemen and use automated software programs to provide financial services such as loans and transactions.
Lawyers and cryptocurrency advocates say that the rapid growth of DeFi in the past year has caught the authorities off guard and has also raised unprecedented questions about the nature of financial regulation.
Bitcoin is the most compelling effort to bypass the traditional financial system, but the so-called DeFi field extends far beyond the scope of cryptocurrency, extending to insurance, derivatives trading and even savings accounts.
In the United States, CFTC Commissioner Dan Berkovitz stated that many DeFi applications may be illegal, and SEC Chairman Gary Gensler stated Singled out These plans present a “series of challenges” for investors and regulators.
Lewis Cohen, a partner at DLx Law, a cryptocurrency law firm, said: “It happened so fast that the regulator was unable to respond to practical issues.
Cohen likened the prosperity of DeFi to “a large-scale DDoS attack on global financial regulation”, referring to a network security attack in which hackers overwhelm their targets through a large number of activities.
A representative of Iosco declined to comment on the event, saying that the event was organized to “support internal work.” The CFTC confirmed the institution’s presence, but declined to comment on the discussion. Uniswap, dYdX and the US Securities and Exchange Commission declined to comment.
DeFi apps oppose earlier rules
Although the employees of the DeFi project said they welcome more clear guidance from regulators, enhanced supervision may pose an existential threat to the growing industry, which is ambitiously creating a new financial system.
Regulators have traditionally monitored activities through intermediaries such as banks and may believe that the decentralized nature of DeFi applications makes the industry irresponsible.
The founders of some of the largest projects, such as Uniswap, have begun to introduce governance systems that aim to decentralize the responsibility of the application among users, rather than a central authority.
Some projects have also distributed tokens that have soared in value over the past year, raising concerns that regulators may classify them as securities and introduce more supervision.
The total amount of pledged assets is Collateral in DeFi applications soars According to data collected by DeFi Pulse, it has grown from less than US$2 billion to more than US$50 billion in the past year.
Cryptocurrency advocates have Resist early attempts Regulate the underlying software program and consider open source projects to be protected statements.
“If you try to impose pre-restrictions and permission-based regulations on these activities, what you are doing is basically banning certain types of speech,” said Peter Van Valkenburgh, research director at the advocacy group Coin Center.
The Financial Action Task Force, an intergovernmental organization that sets standards to prevent global money laundering, has an early flashpoint around its new standards.
Cryptocurrency groups protested these measures, which may force DeFi apps to start implementing “know your customer” rules similar to those required by banks. The FATF said on Friday that it will postpone final guidance until October.
U.S. regulators have yet to take firm action
U.S. regulators have also taken note of this. CFTC Commissioner Berkovitz stated in a recent report Speech Automated software programs for derivatives trading appear to violate the Commodity Exchange Act, which requires futures contracts to be traded through regulated institutions and prohibits individuals with investment assets of less than US$10 million from entering into swap contracts.
Berkovitz said in an interview: “I am fully willing to allow certain applications to be completed more effectively without an intermediary.” “But intermediaries do play an important role in many ways, and we can hold them accountable.”
Berkovitz’s comments indicate that if DeFi applications begin to replicate the traditional derivatives market, the CFTC can begin to supervise them. However, so far, the CFTC and SEC have not taken any specific actions against DeFi.
“If it becomes an unregulated direct competitor in the futures market, it will be problematic,” Berkowitz said.
The founders of the DeFi project believe that users of their open source software programs benefit from a transparent, rule-based transaction execution system.
Michel Bond, CEO of the Digital Asset Market Association, a cryptocurrency industry organization, said that for the SEC to take action against DeFi, it needs to claim “securities jurisdiction” over these projects and their related digital assets.
Bond said: “Just as doctors should not recommend heart surgery for knee abrasions, the rules of an asset class or platform should not be widely applied to dissimilar asset classes or technologies.”
Antonio Juliano, the founder of dYdX, said that the project has been discussed many times with the CFTC, and its so-called perpetual contracts have not yet been traded in the United States, mainly for regulatory reasons.
“Many things that had to be done manually before are no longer needed,” Giuliano said. “This is great for investors.”