How will regulation affect DeFi?
4 min readJul 14, 2020

Like other blockchain projects, DeFi faces technical, operational, economic and other issues, but regulation may be the biggest challenge affecting its development, as it is not entirely up to the project and its participants.So to what extent will regulation affect the evolution of DeFi?

By blockchain, digital currency and other digital technology brings the new governance issues, such as data collection and application, intelligent and automation, ecology and platform, decentralized or centralized management and so on, whether it needs regulatory intervention, in what way and to what extent, has always been a problem in thinking and understanding of all countries in the world.

To sum up the regulatory experience and attitude of countries around the world, the basic principles of regulation generally include the following:

Principles for protecting the application of Scientific and technological innovations (e.g., regulatory sandbox), maintaining stable market order principles (e.g., balancing regulatory arbitrage between innovative and traditional businesses), principles of protecting the legitimate rights and interests of user investors and participants (including the right to know, the right to participate, the right to choose, the right to invest, etc.), principle of safeguarding public interests (such as anti-money laundering, terrorist financing, fraud, market manipulation, etc.) and principle of consistency of rights, obligations, risks and liabilities (such as careful distinction between rights, responsibilities and interests of various participants in decentralization, etc.)

For DeFi, cross-border, market order, asset safety and so on may be important factors.

1. Cross-border

DeFi to some extent transcends territorial regulation and even transcends national and inter-regional jurisdictions.Because in a decentralized network, any smart contract/agreement seems to have no concept of territory-making it more difficult to find a corresponding regulator.

The acceptance of blockchain, digital currency and regulatory policy differences among governments are bound to affect the global expansion of DeFi market.

America has many regulators over tokens, of which the SEC remains a tough regulator.Many DeFi projects issue tokens, including equity, stablecoin, and platform stablecoin, an important part of DeFi, to face regulatory pressure.At the end of 2018, Basi, one of the stablecoin projects, reportedly announced it was closing its business and returning funds to investors at the end of last year because of an exemption from SEC securities regulations.

Libra’s “experience” in dealing with regulation, including cross-border regulation, may be worth learning from DeFi.

Speaking at a Libra House hearing on cross-border regulation and jurisdiction, Mike Crapo, an American Congressman, argues that America should lead Libra’s jurisdiction, even though Libra is based in Switzerland.David A. Marcus agreed and is now working with U.S. regulators.

In answer to the question “How does Libra solve the problem of third world countries which have very strict monetary policies that prevent consumers from accessing foreign currencies?”

‘It’s going to have to be done country-by-country,’ said David A. Marcus, an economist at The Brookings Institution. ‘There are A lot of countries where monetary policy is really tight and it’s going to take a different approach.’I emphasize that any wallet created on a Libra network can interact with other wallets to provide network value.We don’t have to be the only Libra wallet — in some areas we have our own.

2. Market order

In order to maintain the mainstream financial market order and protect the interests of investors, financial regulatory authorities in any region will have regulatory requirements based on maintaining the basic market order, including anti-money laundering, anti-terrorist financing, combating fraud and market manipulation.Therefore, it is necessary to master the identity of relevant participants and the collection of necessary operation information, and require relevant institutions to have a certain continuous operation ability.If the DeFi project fails to meet some basic requirements, the DeFi project may be considered difficult to make people “feel safe”.

On the other hand, unlike the strong centralization of traditional finance, in the DeFi scenario, participants trade through smart contracts, which minimizes the interference of human factors on business and minimizes the possibility of human crimes.At present, DeFi has low requirements on the identity and credit of participants. It mainly relies on the mortgage rate and smart contract to ensure the security of transactions. However, this does not mean that the relationship between users’ credit, assets and mortgage rate will not be written into the smart contract in the future.Cooperation with regulators is also necessary and possible.

3. Asset safety

As we know, DeFi has the advantage of using smart contracts to mortgage assets for lending, issuing stablecoin or other transactions.

We take the security of smart contracts for granted, but we sometimes turn out to be wrong, and smart contracts can be attacked.The reality is that it is not uncommon for assets to be compromised by hacking using smart contract vulnerabilities, so clearly someone should be held responsible.In fact, the final investigation into the bZx attack shows that the breakthrough still lies in the code itself.Other factors that may affect asset security include network, wallet, environment and so on.

Defi essentially puts cryptocurrencies and smart contracts together.The combination of the two inherent risks naturally creates greater risks, both technically and regulatory.Technically speaking, every time multiple systems are connected, interdependent or stacked, there is a great risk.

Therefore, DeFi project and regulatory cooperation is inevitable.The head project shall, at the beginning of the project design and in the operation process, cooperate and communicate with the regulatory department, open the examination authority, and extensively review various risks and countermeasures by means of technology and process design, so as to ensure the compliance, sunshine, safe and stable operation of its own business.


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