BitOoda Regulatory Analysis, 9/14/20: DeFi Regulation Reflecting Bigger Questions on U.S. Crypto Rules

As U.S. regulators begin to grapple with how to approach DeFi, their comments potentially indicate that their broader thinking on digital asset regulation — including concepts like decentralization and the role of financial intermediaries in a digital economy — could be evolving as a result of today’s hottest crypto trend.

Even though Congress is far from taking action to modernize the country’s legislative framework for digital assets, there are continuing discussions on Capitol Hill surrounding the future of digital financial services writ large. Mike Crapo, chair of the Senate Banking Committee, earlier this month wrote a letter to Acting OCC Comptroller Brian Brooks requesting input on the OCC’s approach to integrating digital assets into the country’s banking system. Crapo offered several insights on his views, and we noted his bullish tone on the space:

The cryptocurrency ecosystem is as diverse in its products and functions as the rest of financial services. These and similar innovations are inevitable, beneficial and the U.S. should lead in their development. … The U.S. should develop clear rules of the road that protect businesses and consumers without stifling future innovation.”

Along the same lines, SEC Commissioner Hester Peirce has astutely noted the significant regulatory challenges posed by DeFi when it comes to enabling innovation while protecting investors. She seems to have quickly zeroed in on the meaning and practice of decentralization as a key concept to understand, regardless of how the SEC and other agencies ultimately choose to approach DeFi. In asking who exactly would be regulated (i.e., held accountable) in any potential DeFi regulation, Peirce states “It’s going to challenge the way we regulate. And it’s going to cause us to ask questions about what we think the role of a regulator is in DeFi.” She rightly contrasts DeFi with ICOs in terms of the goals of the projects and offerings, and notes the challenge the SEC will face in regulating DeFi, particularly because — as pointed out by our friends at Coin Center — taking action against software developers or individual users of that software would be legally challenging. Particularly given Peirce’s view that the SEC should take more of a hands-off approach, regulating a decentralized P2P-focused arena will most likely continue to vex the Commission.

With the explosion of DeFi, along with the continued growth of CBDCs (including the Digital Dollar) and crypto adoption growing worldwide, we did note with optimism the relatively short time it has taken for regulators to recognize DeFi as an area deserving of their attention and understanding, indicating a level of foundational knowledge of digital assets that will hopefully allow them to pivot to keep up with the quickly-advancing space. For next-generation financial services firms like BitOoda, we view this trend as positive for our ability to continue driving the advancement of sophisticated and compliant digital finance products and services for clients.

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