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Blockchain-based Decentralized Finance (DeFi) is widely recognized by some within the banking sector as an existential threat, as highlighted in an article by the New York Times. Reacting to their concerns, regulatory bodies are starting to send feelers on how to best respond.
DeFi’s Success Attracts Regulatory Scrutiny
Those who have been following the crypto sector may recall when Bank of America (BoA) published Bitcoin’s Dirty Little Secrets research this March. For the first time, a major financial institution recognized DeFi as “the most fundamental challenge to modern finance that we’ve encountered”.
Because Ethereum’s smart contracts can replicate functions that serve as the backbone of modern finance, and do so in a trustless manner, banking as we know it may become obsolete. A month after the BoA’s report, Jamie Dimon, the CEO of JPMorgan Chase, told his shareholders that FinTech products using digital assets are making banks less competitive.
“From loans to payment systems to investing, they have done a great job in developing easy-to-use, intuitive, fast and smart products.”
Further still, with near-zero banking interest rates, trustless DeFi is gaining massive traction. This growth represents nothing less than the birth of a new industry. DeFi went from under one billion in the first half of 2020, to about $122.83 billion gross value locked across major smart contract platforms.
Although Ethereum is clearly the dApp leader, we may yet see surprises from Solana as it outperformed Ethereum by 500%. No doubt, such rapid success in a year’s time took both banks and regulators by surprise.
Elizabeth Warren’s Speaks Out Again Against Digital Assets
Last month, The Tokenist covered an exchange between Sen. Warren and prof. Angela Walch, going in-depth through their objections and concerns around digital assets. At the time, she called DeFi developers “shadowy super coders”. In her most recent Sunday interview with the NYT, she continued in this vein:
“Crypto is the new shadow bank,” Sen. Warren then tracked the purported threat. “It provides many of the same services, but without the consumer protections or financial stability that back up the traditional system.”
While it is true that DeFi suffers from code exploits from time to time, in 2020, they constituted only 3.6% of general online fraud.
Sen. Warren also warned of the perceived dangers of stablecoins, something that could be the bridge between crypto and fiat currencies. By banning stablecoin companies from holding bank accounts, this “could effectively end the surging market”, according to Sen. Warren.
On the other hand, Gary Gensler, the SEC Chair, is taking a conciliatory approach, urging both DeFi and FinTech platforms to embrace regulation.
“There are a lot of platforms that are in operation today that would do better engaging and instead there is a bit of begging for forgiveness, rather than asking for permission.”
So far, regulatory agencies have only fired warning shots against firms such as Binance and BlockFi. Gensler is arguably pushing for crypto exchanges and platforms to be registered under his domain as securities. However, it remains to be seen how the intragovernmental turf war will be resolved.
Sen. Warren places importance on the digital aspect instead of crypto and decentralization. Do you think people care more about convenience than sound money? Let us know in the comments below.