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In private video calls last week, some of the world’s fastest-growing cryptocurrencies were educated by global financial regulators, largely in a corner of the market that has avoided oversight: the rising world of decentralized finance.
The conference featured presentations of decentralized Uniswap exchange and dYdX derivatives trading, among popular programs called DeFi, according to people familiar with the conference.
Citizens said representatives of the Futures Commodity Trading Committee and the Securities and Exchange Commission were also present at the event, organized by the International Organization of Securities Commissions.
The previously unannounced meeting shows how financial regulators have begun to pay more attention to DeFi, a collection of cryptocurrency projects aimed at cutting the intermediary and providing financial services, using automated software.
Lawyers and proponents of the cryptocurrency have said the authorities have caught up with DeFi’s rapid growth over the past year, but it has also raised unprecedented questions about the nature of financial regulation.
Bitcoin is one of the biggest efforts to avoid traditional financial systems, but the so-called DeFi sector goes beyond cryptocurrencies to insurance, derivatives trading and even savings accounts.
In the US, CFTC Commissioner Dan Berkovitz has suggested that many applications to DeFi may be illegal, and SEC President Gary Gensler separately the programs pose “several challenges” for investors and regulators.
“So much is happening so quickly that regulators can’t respond, as a practical thing,” said Lewis Cohen, a partner in DLx Law’s cryptocurrency law firm.
Cohen compared DeFi’s rise to a “huge DDoS attack on global financial regulation,” citing a kind of cybersecurity attack where hackers outperform their targets with large volumes of activity.
An Iosco representative declined to comment on the incident, saying it was organized to “help with internal work.” He confirmed the assistance of the CFTC agency, but declined to discuss it. Uniswap, dYdX and the SEC declined to comment.
DeFi applications run counter to the previous rules
Although DeFi project staff said they would accept clearer guidelines from regulators, greater oversight could pose an existential threat to the growing sector as it intends to create a completely new financial system.
Regulators traditionally control the activity of intermediaries in the form of banks, and may decide that the decentralized nature of DeFi applications makes the sector irresponsible.
The creators of some of the largest projects, such as Uniswap, have begun to introduce governance systems that aim to spread the responsibility of applications among users, rather than with a central authority.
Several projects have also distributed tokens that have increased in value over the past year, raising concerns for regulators to classify them as securities and establish greater oversight.
Total assets accrued Warranty has increased in DeFi applications over the past year, data collected by DeFi Pulse has risen from less than $ 2 billion to more than $ 50 billion.
Cryptocurrency advocates have it he resisted the initial attempts to regulate the underlying software, arguing that open source projects are speech-protected.
“If you’re trying to set rules based on restrictions and permits beforehand in those activities, what you’re mostly doing is creating a ban on certain types of speech,” said Peter Van Valkenburgh, director of research at the Coin Center, the advocacy group.
Flash point was created around the new guidelines developed by the Financial Action Task Force, an intergovernmental organization that develops standards to prevent money laundering worldwide.
A draft version of the group’s newest guideline appeared the group broadly expanded the definition of “virtual asset service providers” including decentralized software.
Cryptocurrency groups have protested against these measures, as DeFi applications are forcing them to start imposing customer rules as required by banks, and the FATF said on Friday it would delay the final guidance until October.
U.S. regulators have yet to take action
U.S. regulators have also been warned. CFTC Commissioner Berkovitz has just said that speech automated derivatives trading software programs appear to violate the Commodity Exchange Act by requiring futures contracts to be traded by regulated entities and individuals with less than $ 10 million in less active investment to enter into swap contracts.
“I’m completely open to some applications that can be done more effectively without intermediaries,” Berkovitz said in an interview. “But intermediaries play an important role in many ways, and we can have responsibilities.”
Berkovitz’s comments suggested that CFTC DeFi applications could begin to be regulated if traditional derivatives markets begin to repeat themselves. So far, however, the CFTC and the SEC have not taken any specific action against DeFi.
“If there were a direct unregulated competitor in the futures market, that would be a problem,” Berkovitz said.
The creators of the DeFi project argued that users of open source software programs were transparent and beneficial systems based on the rules for conducting transactions.
For the SEC to take action against DeFi, it would have to assert “securities jurisdiction” over programs and related digital assets, said Michelle Bond, of the Asset Digital Markets for Association, an organization in the cryptocurrency industry.
“Just as a doctor should not recommend cardiac surgery for knee scraping, the regulations in an asset class or platform should not be widely applied to assets or technologies that are not similar,” Bond said.
Antonio Juliano, founder of dYdX, said the project has had many discussions with the CFTC, and that so-called permanent contracts are not yet available for trading in the U.S. largely for regulatory reasons.
“A lot of the things that had to be done by hand before don’t have to be done,” Julian said. “That’s very good for investors.”
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