This article examines the complexities surrounding the regulation of decentralized financial systems, highlighting critical aspects of technology and legal norms interaction.
Regulatory Challenges in DeFi
Over the past year, decentralized finance (DeFi) platforms have locked over $60 billion worth of crypto assets. Yet, most jurisdictions still lack a clear definition for decentralized autonomous organizations (DAOs), slowing innovation and undermining trust in regulatory institutions. Lawmakers still assume a centralized actor can be licensed or subpoenaed, even though DAOs are designed to be decentralized.
Policy as Code
To adequately govern decentralized mechanisms, a new policy infrastructure is needed that is as composable and programmable as the technologies it oversees. This means embedding compliance layers directly into the code of decentralized financial protocols, allowing for more effective adaptation to jurisdictional requirements and real-time changes.
Legal Clarity for DeFi
Embedding compliance in code has the potential to de-risk DeFi, attracting new investors and users. Legal clarity would simplify the assessment of token legal status and reduce reliance on ambiguous legal interpretations. However, despite the advantages, programmable policy has its risks, such as the potential for code exploitation and the need for democratic oversight of regulatory modules to maintain trust and transparency in Web3.
The necessity of adopting new approaches to regulate decentralized finance is becoming increasingly pressing. Success will depend on the ability to adapt to new structures and technologies, potentially leading to more inclusive and transparent financial systems.
