How might regulation affect DeFi?
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Regulation's impact on DeFi (decentralized finance) is multifaceted, with several potential effects highlighted by experts.
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Regulatory Engagement and Evolution: Santiago Santos underscores the necessity for regulators to adapt to new technologies similar to the evolution seen in the entertainment industry. He believes that sensible, new regulations tailored to the unique aspects of DeFi would be more effective than applying outdated rules meant for traditional finance 1.
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System Resilience and Governance: Hester Peirce points out the challenge regulators face due to the decentralized nature of DeFi, which lacks a central entity to hold accountable. Despite this, she sees the potential for the market to self-regulate, where users push for credible project backing beyond just initial offerings 2 3.
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Custody and Compliance: Jake Chervinsky explains that decentralization can alter how regulations apply, highlighting that non-custodial DeFi platforms may not trigger the same regulatory requirements as centralized entities. This distinction is crucial under frameworks like the Bank Secrecy Act 4.
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Market Response to Regulation: The possibility of capital moving from centralized exchanges to DeFi in response to regulatory actions, as seen with China's crypto ban, suggests that DeFi offers resilience and continued growth despite regulatory pressures 5.
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Regulatory Tools and Roles: Vance Spencer envisions a future where regulators might shift their role from enforcing compliance to auditing smart contracts and protocol operations. This evolution could lead to more constructive oversight and greater consumer protection 6.
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Principles-Based Regulation: Hester Peirce advocates for principles-based rules rather than technology-specific ones, which can be easier to navigate and more adaptable to rapid changes in DeFi innovation 3.
Overall, the integration of regulation into DeFi is likely to bring both challenges and opportunities, requiring a harmonious balance between innovation and consumer protection.
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