In a private video call last week, some of the world’s fastest-growing cryptocurrency startups tutored global financial regulators in a corner of the market that has largely escaped censorship: the burgeoning world of decentralized finance.
The event featured presentations by decentralized exchange Uniswap and derivatives trading venue dYdX, among the so-called popular DeFi programs, according to people familiar with the conference.
People said representatives from the CFTC and the Securities and Exchange Commission also attended the event, which was hosted by the International Organization of Securities Commissions.
The gathering, which has not been previously reported, shows how financial regulators are beginning to pay more attention to DeFi, a group of cryptocurrency projects aimed at cutting out the middleman and offering financial services such as lending and trading using automated software.
Cryptocurrency advocates and lawyers say the rapid growth of DeFi in the past year has taken authorities by surprise, while also raising unprecedented questions about the nature of financial regulation.
Bitcoin is the most well-known effort to bypass traditional financial systems but the so-called DeFi sector extends well beyond cryptocurrencies to insurance, derivative trading, and even savings accounts.
In the US, CFTC Commissioner Dan Berkowitz has suggested that many DeFi applications may be illegal, and SEC President Gary Gensler has The end of celibacy The programs raise “a number of challenges” for investors and regulators.
“There is so much going on so fast that, in practice, regulators are unable to respond,” said Louis Cohen, partner at DLx Law, a crypto-law firm.
Cohen compared the boom in DeFi to a “giant DDoS attack on global financial regulation,” referring to a type of cybersecurity attack where hackers overwhelm their targets with massive volumes of activity.
An Iosco representative declined to comment on the event, saying it was organized to “support internal work.” The CFTC confirmed the agency’s attendance but declined to comment on the discussions. Uniswap, dYdX and the SEC declined to comment.
DeFi apps resist early rules
While employees at DeFi projects said they would welcome clearer guidance from regulators, increased oversight could pose an existential threat to the growing sector, which has ambitions to create an entirely new financial system.
Regulators have traditionally monitored activity flowing through intermediaries such as banks, and may decide that the decentralized nature of DeFi applications makes the sector unaccountable.
The founders of some of the largest projects, such as Uniswap, have begun to introduce governance systems that aim to spread responsibility for applications among their users, rather than a central authority.
Several projects have also been distributing tokens that have skyrocketed in value in the past year, raising fears that regulators could classify them as securities and impose more scrutiny.
Total assets pledged Safeguards Soared in DeFi Apps In the past year, it has grown from less than $2 billion to more than $50 billion, according to data compiled by DeFi Pulse.
Cryptocurrency advocates have Resist early attempts To organize basic software, arguing that open source projects are protected speech.
“If you try to impose ex ante restrictions and permission-based regulations on these activities, basically what you are doing is banning certain types of speech,” said Peter Van Valkenburg, director of research at the Coin Center, an advocacy group.
A bright spot emerged early on about new guidelines set by the Financial Action Task Force, an intergovernmental organization working to develop standards to prevent global money laundering.
Cryptocurrency groups have protested against the measures, which could force DeFi apps to begin enforcing know-your-customer rules similar to those required of banks, and the Financial Action Task Force said on Friday it would delay final guidance until October.
US regulators have not yet taken firm measures
As noted by the US regulators. Berkowitz, commissioner of the Commodity Futures Trading Commission, said recently Speech Derivatives trading automated software appears to violate the Commodity Exchange Act, which requires futures contracts to be traded through regulated bodies and prohibits individuals with less than $10 million in invested assets from entering into swap contracts.
“I am completely open to having certain applications that can be done more efficiently without intermediaries,” Berkowitz said in an interview. “But mediators in many respects do an important job, and we can hold them accountable.”
Berkowitz’s comments indicated that the CFTC could start regulating DeFi applications if it begins to replicate the traditional derivatives market. So far, though, the CFTC and SEC have not taken any concrete action against DeFi.
“If it were to become an unregulated direct competitor in the futures market, that would be a problem,” Berkowitz said.
The founders of the DeFi project argue that users of their open source software have benefited from transparent rules-based systems for executing transactions.
For the SEC to take action against DeFi, Michelle Bond, chief executive of the Digital Asset Markets Association, the cryptocurrency industry body, said it would need to assert “securities jurisdiction” over related software and digital assets.
“Just as a physician should not recommend heart surgery for a knee abrasion, asset class or platform regulations should not be widely applied to non-similar asset classes or technologies,” Bond said.
Antonio Giuliano, founder of dYdX, said the project has had multiple discussions with the CFTC, and the so-called perpetual contracts were not yet available for trading in the US largely due to regulatory reasons.
“There aren’t a lot of things that had to be done by hand anymore,” Giuliano said. “This is great for investors.”