Can the SEC and Other Financial Regulators Succeed in Regulating DeFi?

News / 01.02.2021

In the wake of COVID-19, many situations have gone south, with many economies crashing as the global pandemic ravaged the world’s rest. However, this was a perfect chance for the digital asset industry, including decentralized finance (DeFi), to rise to fame. The cashless options the space presented to many was a well-needed escape from unnecessary risks of contracting the virus.

We have recently seen a boost in a lot of top coins as BTC and ETH reached new all-time highs. The DeFi sector has followed suit, undeniably catching on more and more acceptance due to the lucrative deals in yield farming and liquidity mining.

However, with the boom comes several safety and accountability loopholes that investors fall into. There are cases of hacks and DeFi scams that lead to millions of dollars in investor funds’ losses. 

These factors and the decentralized nature of DeFi are getting financial watchdogs discussing how they can regulate the space. Furthermore, the total value locked in DeFi has surged dramatically, currently set at $26.911 billion, spiking their interest all the more. The big question is, is it remotely possible to manage this visionary?

DeFi Poses a Greater Regulatory Challenge within Crypto

A point to note is that financial regulators, including the SEC, CFTC, and OCC, do not discredit the lengths DeFi is beneficial to citizens. However, SEC’s commissioner Hester Pierce recently aired the need for a well-regulated environment to adopt crypto by the US government. 

Late last year, the commission filed a lawsuit against Ripple Labs for the illegal sale of XRP, consequently earning $1.3B. This action solidifies the regulatory presence of the SEC in the crypto space. 

Hester commented that the regulation of DeFi might be a tricky situation but expects that the commission will venture into the same this year. She mentioned that decentralization and the multitude of protocols flooding the DeFi space, finding an intermediary to discuss the issue would be among the main challenges. 

Pierce also aired the ambiguity of DeFi with regards to the SEC regulatory structure. Thus, she suggested the extensive clarification of rules that may apply within DeFi to avoid future skirmishes.  

Increased Interest in the Crypto Space

According to Pierce, the new president, Joe Biden, to nominate Gary Gensler as the new SEC chairman may positively impact the current vision. She added that the new leadership is crucial to achieving the right ideas and proposals to handle the DeFi regulation hurdle. 

Gensler’s contribution to the Obama government as the CFTC chair places him in a better position in knowledge and understanding of the best ways forward within crypto.

The Office of the Comptroller of the Currency (OCC) recently issued guidelines giving banks the go-ahead to handle stablecoins. Many see this as baby steps towards regulators and the US government at large accepting crypto. 

While this boost in regulators’ interest in the crypto space may pose a good option for investors, some may suggest that the DeFi sector’s self-regulation would be the best approach. Even though the regulators suggest that they do not mean to halt DeFi’s progress, much can be said about how their presence will be a disadvantage to the industry. Depending on how things roll out, we are yet to see which path will be best for the continued boost of DeFi’s advancements. 

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Kyle is a tech lover and a huge fan of Satoshi. He has a passion for cryptocurrency and the splendid technology behind it all - the blockchain. He could sound gullible, but he believes bitcoin will hit 100k before the next halving.