DeFi Industry Ponders Strategy as Regulators Begin to Circle

Source: Adobe / Mantinov

2020 wasn’t much good, but it was good very good for one thing: decentralized financing (DeFi). The sector has been booming this year. And while DeFi fads have been common, it seems that the wider DeFi sector has built up a burst of steam and will turn out to be no more lightning in the pan.

But those who expect the DeFi party to continue raging over the next year could experience a rude awakening – with regulators expected to get into this once-under-the-radar industry.

These were the conclusions of the participants in the V20 Summit of the crypto industry’s leaders and regulators last week, including the Financial Action Task Force (FATF), the American financial department and the Japanese Financial services agency.

And while the FATF had already fired a shot over the arches of the peer-to-peer crypto trading platform industry (P2P) on the opening day of the V20 summit, the world of DeFi also seems to be firmly in the crosshairs.

Speak with Cryptonews.comJonathan DeCarteret, the CEO of INDX Capital, a crypto mutual fund specializing in masternode investing, said the industry widely accepts that “strong regulation” would be catastrophic for the emerging sector and that “DeFi would likely collapse overnight.”

DeCarteret participated in the V20 behind closed doors panel discussion titled “Using P2P: Managing Money Laundering Risks / Combating Terrorist Finance (AML-CFT) Associated With Decentralized Finance (DeFi)” with others, including Tyler Spalding. the co-founder of the specialist in crypto payments Flexa.

But Spalding told the story that DeFi insiders were united in their intention to find a way to keep regulators on the side.

He said,

“Despite the new possibilities and processes within DeFi, there definitely seems to be an approach that is compatible with the existing legal framework.”

DeCarteret suggested that DeFi insiders, including those on the V20 panel, agreed that “best practice-led self-regulation” does not create new protocols and standards as it does travel rule compliance solutions for crypto exchanges was recommended.

DeCarteret stated that the “Decentralized Autonomous Organization (DAO)” sentiment was, “Anonymous and peer-driven protocols will be extremely difficult to regulate.”

Crucially, however, the FATF does not accept the idea of ​​decentralization as DeCarteret adds:

“The FATF claims that there is always someone holding the keys.”

Spalding added that “for the most part” market participants, especially those represented on the V20 panel, are “enthusiastically supported in building a compliant and meaningful ecosystem”.

But it seems DeFi is now at a crossroads.

DeCarteret stated that panellists were divided on whether or not regulatory efforts should focus on restricting regulation to the fiat on / off ramping process or trying to regulate private keys instead.

Spalding said the way was free. He said,

“The simplest and most effective approach is to ensure compliant on / off ramps for digital assets. It is impossible to fully monitor or enforce transactions on decentralized networks, which is in line with current global cash-based systems. By ensuring adequate compliance for users entering and exiting these networks, the vast majority of illegal activity can be effectively mitigated. “

However, DeCarteret suggested a different course of action, adding that the question was “incredibly difficult and complex to solve”.

“Regulating the Fiat on / off ramp does not resolve inappropriateness or incompetence at the protocol level. Similarly, enforcement at the protocol level damages the smooth nature of DeFi. I am suggesting a Know-Your-Customer (KYC) / AML version of private wallets that would be required to interact with DeFi protocols, ”he said.

DeFi defense

Regardless of which course the industry takes, it is clear that the ball is firmly anchored in the industry’s playing field – and that the main players are now facing a race against time before the FATF and its friends start shooting at DeFi .

With more than $ 14 billion worth of funds now “tied to DeFi protocols,” DeCarteret acknowledged that “they will appear on regulators’ radars.”

It’s hard to look into the crystal ball and see anything other than more hectic activity for the next year, but DeCarteret claimed that regulation would put big fish in the pool, with a number of mainstream financial industry players already watching what would become an increasingly delicious looking cake.

DeCarteret said:

“The landscape will see crypto regulation as an accepted good and this will accelerate institutional adoption. The chance is getting too great to be marginalized. “

In the meantime, both Spalding and DeCarteret appear to be aware of the need to keep their own ships in order and address industry-wide issues.

Spalding stated that his company has already taken steps to deal with such risks, stating that Flexa operates with the required licensing and applies KYC / AML standards for individuals and businesses for any jurisdiction where it facilitates retail business: ” In addition, the companies within the Flexa network, such as stock exchange, payment and POS providers, also have relevant licenses. “

And DeCarteret claimed that “INDX structured its business as a regulatory compliant offshore tokenize fund to address these regulatory risks.”
Learn more:
The DeFi sector is breaking the law – it’s time to act
FATF signals more pressure on the crypto industry as it is moving too slowly
Crypto regulation in 2021: the piecemeal approach and new winds