Should regulations play a role in DeFi?
One of the reasons that people say regulations for DeFi is an oxymoron is that the protocols are decentralized. That’s the important bit. Many are saying that “DeFi” subjected to any sort of limits or controls whatsoever, isn’t really “DeFi.” crypto-lawyer Stephen Palley told Coindesk, that when discussing enforcement, the sort of kill switches or other controls necessary for regulation to work are usually controlled by a small group of insiders, whereas DeFi protocols are controlled by nobody.
Others say that those we believe only anonymous systems qualify as “DeFi” are being narrow-minded. David Z. Morris writes that there is sense in being more open minded about it, because “There are unique features to the technology, such as self-custody and shared liquidity pools, that don’t depend on anonymity and that could offer real benefits to the way we run mainstream asset markets.”
For example, DeFi could lead to innovations in know-your-customer (KYC) practices that would significantly increase privacy and security for individuals even in a regulated environment. Morris says there should even be a debate over whether or not we should still call “permissioned trading protocols DeFi.”
Morris suggests that the best way forward for DeFi is that a large portion of it is regulated in the future, and that this will allow it to slowly eat away at more traditional trading technologies. He allows that, “a smaller group of protocols that are truly and carefully decentralized will continue operating outside of regulation,” will exist, although the stakes for using each will be different. He compares it to the evolution of online piracy, saying: “Law enforcement has applied enough pressure to make it really hard to continue running a torrent site, but you can still find all the free Game of Thrones you could ask for if you’re willing to do some research and take some risks.”
From a more political perspective, there are benefits to keeping “stateless DeFi” alive, because it gives those who may be being monitored by government, access to finance with the oversight of governments and corporate entities. This does not mean criminals; it refers to dissidents, refugees and those in similar situations. This may become more important as “government and corporate oversight of our finances and Internet activity becomes more terrifyingly normalized,” says Morris, adding, “cultivating autonomous zones outside of state control will be a check on the most authoritarian impulses of lawmakers and regulators.”
Let’s not forget that Bitcoin has benefited from the regulated centralized exchanges before we dismiss the idea of regulating DeFi, otherwise we may lose both its potential and the concrete utilitarian benefits DeFi simply because of resistance to the idea.