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Regulators are eyeing the DeFi industry

www.thecoinrepublic.com 28 June 2021 02:55, UTC
Reading time: ~3 m

  • DeFi industry is attracting more users with financial regulators
  • Regulators are gathering to gain education regarding the decentralized industry
  • Several law enforcement bodies believe that the dApps could be illegal and make the task of regulators more challenging
  • The Crypto community believes that the sector has caught authorities off-guard
  • The crypto community is protesting against any regulatory measures in the booming industry

DeFi has continued to grow at a tremendous pace in the cryptosphere. The protocol aims to cut out the middlemen from the world of finance. Observing the growth of the sector, it seems that regulators risk being overwhelmed. Last week on private video calls, financial regulators were educated about the industry by a few fastest growing start-ups. The event was featured by Uniswap, a decentralized exchange (DEX), and dYdX, a derivatives trading platform. Other decentralized programs had also participated in the conference.

Financial regulators attended the DeFi education event

According to a Financial Times report, the International Organization of Securities Commissions had hosted an event. The event aimed to educate the financial regulators about the DeFi industry. It is known that Representatives from the US Commodity Futures Trading Commission (CFTC) and the US Securities and Exchange Commission (SEC) had participated in the conference. 

Notably, The gathering of financial regulators and DeFi start-ups indicates the attention of such enforcement towards the industry.

Decentralized finance industry is booming

Lawyers and proponents in the cryptosphere have deemed that the DeFi industry has caught authorities off-guard. Moreover, the sector has also raised unprecedented questions regarding the nature of financial regulation.

Notably, the flagship crypto asset is the highest profiled effort to bypass the traditional financial ecosystem. On the other hand, the decentralized industry has helped extend the system far beyond digital currencies to insurance, bonds, trading, and savings accounts.

Are dApps illegal and challenging for regulators?

In the event, Dan Berkovitz, commissioner of the US CFTC, suggested that decentralized applications could be illegal. On the other side, Gary Gensler, the chairperson of the US SEC, noted that the DeFi protocols are raising a number of challenges for investors as well as regulators. Lewis Cohen, a partner at DLx Law, responded to the claims of the regulators. 

According to Cohen, everything is happening at a greater pace in the industry, though the regulators are unable to respond as a practical matter. Cohen compared the growth of the decentralized financial sector to a giant DDOS attack on the regulations. Moreover, he referred to a kind of cybersecurity assault where illicit players overwhelm their target with huge volumes of acts.

On the other hand, Iosco’s representative directly declined to comment. The representative believed that the event had been organized to support internal work.

dApps push back against early attempts to regulate

DeFi projects have claimed to welcome clearer guidance from regulators. However, experts believe that increased oversight could pose an existential threat to the booming industry. Law enforcement has traditionally observed the activities through intermediaries and concludes that the decentralized nature of the industry makes it unaccountable.

Projects like Uniswap are introducing a governance system to their platform to spread responsibility for the dApps among their users. It is also observed that many projects have distributed tokens that have surged in terms of value. These activities are also raising concerns among regulators whether they might not be able to classify such tokens as securities.

On the other hand, the amount of assets pledged as collateral is skyrocketing. Crypto proponents are also restricted from regulating the underlying programs. Such advocates deemed that the open-source projects are protected speech. Hence, if regulators try to regulate these activities, we will witness a ban on certain types of speech. Indeed, the crypto community is protesting against the implementation of KYC rules in the DeFi industry.

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