DeFi: Who, what, and how do we regulate in a code-governed, borderless world?

Regulators are challenged by the decentralized, disintermediated, and borderless blockchain networks, but DeFi is the future in finance. Keep your hats on, boys and girls! It’s a new world, a financial system that is free from intermediaries that anyone can access 24 hour a day using a mobile phone and a bank account. Julien Bouteloup explained to me that DeFi is a fully decentralised technology that is transparent and run by mathematics. He continued, “No one can beat that.” It is impossible to beat that. GitHub didn’t exist in the ’90s. First, the fact that we’re going at the speed of light, is because everything is open source, and everyone can participate.”Related: DeFi literacy: Universities embrace decentralized finance educationA Novum Insights report stated back in August that since 2020, the DeFi market has grown by a factor 40, with the total value locked in DeFi at around $61 billion at the time (while the current TVL stands at around $165 billion). The capitalization of stablecoins, an important part DeFi, increased by $112 billion in the first half 2021. DeFi investors are seeing huge gains, but they are also losing money as DeFi is not controlled, moderated or intermediated, hosted, validated or hosted by a central authority. Only smart contracts drive DeFi. Consumers have no recourse if a smart contractual fails or is attacked. Loretta Joseph, global expert in digital asset regulation, told me that regulators protect investors and consumers. DeFi is completely P2P, as there are no intermediaries to regulate. It is up to you to decide how it will be regulated in future. Scammers are inevitable. People will be scammed. Experts answeredIndeed, DeFi protocols has lost approximately $285 million to hacks or other exploit attacks since 2019. Experts stated that the majority of hacks occurred due to incompetent developers and coding errors. This is significant given that the entire sector relies on code. It’s great for the system’s resilience. It’s much more difficult for us to regulate the system. Nonfungible tokens are exploding and generating excitement, confusion legal questions, and huge gains. NFT markets are also attracting large cryptocurrency transactions. This will likely bother regulators who may view the big money moves in NFTs to be money laundering. Regulators face additional challenges when it comes to macro-level decentralization and the ability to manage financial stability and protect consumer interest. DeFi decentralized autonomous organisations (DAOs), are popular for transferring cryptocurrencies between different blockchains. This allows for crypto lending and yield farming. DAOs are responsible for overseeing more than $543 million, according to conservative estimates. Information technology governance and corporate governance are two distinct areas in a DAO. Smart contracts are used to govern and operate the organization. These smart contracts are monitored and enforced using algorithms. The code governs and executes. Who is responsible if the algorithms fail? A group of researchers has published a joint article titled “Regulating Blockchain and DLT: A Technology Regulator’s Perspective.” They highlight the importance of identifying central points that can be used for regulation, such as miners or core software developers, and end users. They also raise the possibility that regulatory or government players could be potential participants. (2) Issues of liability — could core developers be held responsible? (3) The challenges associated with smart contracts’ immutability and inability to be updated; and (4) the need to ensure quality assurance and technology audit processes are followed by regulators. Decentralized exchanges allow users trade directly from their wallets, in a P2P fashion, without intermediaries. The Financial Action Task Force (FATF), a global money-laundering watchdog, has exchanges in its sights. Christopher Harding, the chief compliance officer of Civic, noted that the FATF proposed guidelines which suggest that DApps will need to comply with country-specific laws enforcing FATF, AML, and Counter-Terrorism Financing requirements.Related: FATF draft guidance targets DeFi with complianceA recent review of 16 leading exchange platforms by the London School of Economics and Political Science found that just four were subject to a significant level of regulation related to trading, so there is a clear gap. A project must pass auditing to be listed on any major exchange. However, meaningful security does not end there. Toby Lewis, CEO at Novum Insights, stated that smart contracts can be hacked. Even though they have been audited, that does not guarantee that the contract will be secure from exploits. Do your research before you start. In an open-source environment, where projects are growing at an average compound rate of 20% per annum, it is difficult to find the right time to regulate. This ensures that people are not exposed to risk, but innovation is not restricted. Some governments have attempted to achieve this balance using regulatory sandboxes (U.K. Bermuda, India, South Korea and Mauritius), while others have gone straight into legislating (San Marino Bermuda, Malta, Liechtenstein). Leading DeFi figures embrace regulation as part of the industry’s maturing. Stani Kulechov (founder of DeFi lending platform Aave) stated that peer review is the future. “Auditors don’t guarantee security, they merely help to spot something that the team wasn’t aware.” It will eventually be about peer review and we have to find community incentives to empower more security professionals into the space.” Emeliano Bonassi also spoke about ReviewsDAO which is a peer review forum that connects security experts with projects seeking reviews. Bonassi sees the potential for this to be a learning opportunity where people can contribute to improving security of the ecosystem. Tan Tran, CEO at Vemanti Group, said: “Going forward I do see an accelerated adoption platform with permissionless financial products. Each will be governed with a regulated-party with central control to ensure accountability. This is not about stopping innovation. It’s not about stopping innovation. We expect regulators to look for ways in which they can improve technology quality assurance and DeFi governance. This is only possible when the industry is involved. Mark Taylor stressed that regulators must continue to work with the crypto industry players to protect consumers. It’s truly different. It means that anyone can access technology anywhere in the world and doesn’t have to ask permission. It’s important to encourage innovation and build a better world. This is a new game. This is a new game. Regulators and the industry will need to work together. She holds a PhD from the University of Queensland. She has held multiple roles in the British Blockchain & Frontier Technologies Association and the Kerala Blockchain Academy. She has published numerous articles and books on Blockchain. She was featured in Crypto Curry Club’s 100 Best Women in Crypto, Decade of Women Collaboratory’s Top 10 Digital Frontier Women, Lattice’s Top 100 Fintech Influencers For SDGs, Lattice’s Top 100 Fintech Women, and Thinkers360’s Top 50 Global Thought Leaderships and Influencers On Blockchain.

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