Is the Regulation of Decentralized Finance (DeFi) Around the Corner?
2020 proved a solid year for the DeFi industry. The total value of funds blocked in applications exceeded $20 billion in December. Staking and yield farming wormed their way into wider popular culture. Governance tokens and flash loans went on promoting the idea of decentralization.
What does 2021 hold for a sector that could transform the economy? Hate to break it to you, but we suspect that DeFi-services are sitting on a powder keg, and lawmakers are gradually gathering around it… To understand what we mean just keep reading.
The United States
Fintech companies offering anonymity to crypto lovers have to obey Anti-Money Laundering Laws. This announcement was made by Kenneth A. Blanco, Director Financial Crimes Enforcement Network (FinCEN). He stressed that AML is necessary for any new payment provider with plans to expand its business. It does not matter whether this is about stablecoins, centralized or decentralized currency.
The target of Blanco’s attacks became anonymous payment mechanisms. According to him, they can hide criminal activity, contribute to the opioid crisis and human trafficking. “You need to know who is on the other side of the transaction, there should be complete transparency in this regard. All we ask for is a name, address, account number, recipient, and the sum of the transfer. So, when you say you don’t know who’s on the other side, you’re going to be in big trouble. You must know, that’s what we expect”, explained Blanco.
He also said that people commonly use false standards of measurement when it comes to stablecoins. They think these are different from other cryptocurrencies. FinCEN in turn makes no distinction between them.
Supporters of the DeFi sector first raised the alert last summer. The US regulator opened an investigation against the creators of Abra, a financial services and technology company. They were ordered to pay a fine of $300,000. According to official data, the management of Abra was engaged in the exchange of crypto and contracts for foreign currencies, which was breaking federal securities law. According to the Law, such operations must be regulated. As a result, Abra was forced to “close its doors”.
The European Union
The European Commission proposed the EU legislation on virtual currency. The proposal sought to allow companies to seize the opportunities which these coins offer. The Regulation of Markets in Crypto-assets (MiCA) will drive innovation while safeguarding financial stability and putting investors out of risks. This will give legal precision, clarity, and certainty that was necessary for issuers and providers of digital money.
Protective measures include capital requirements, the financial security of assets, a mandatory procedure for the making of complaints by the investor, and investor rights with respect to the issuer. Issuers of major coins backed by a real-world asset (so-called global stablecoins) will be subject to even stricter requirements.
How Will This Affect the DeFi Space?
How Will This Affect the DeFi Space?
Representatives of the decentralized finance sector claim that their products are 100% decentralized, competitive with traditional markets, and meet the requirements of regulatory authorities. The problem is that open finance was created to displace the traditional one. That’s why recent months have witnessed more and more statements from the government about the “protection of DeFi users”.
In general, this sphere is not as decentralized as it may seem at first glance, at least in the United States. It is necessary to obtain a license to provide loans, abide by certain rules in token trading (as in the case with the Cryptobridge exchange).
It is no secret that the authorities in the developed world show an unfriendly attitude towards cryptocurrency and in particular DeFi. Many tokens of ICO projects had the characteristics of securities and fell under the demands of regulators in 2017. For this reason, such projects as Compound, Uniswap, and Kyber need to be more alert. Remember that members of the DeFi sector offer users dividends for certain actions (for example, staking or yield farming).
Maya Zehavi, head of Business Development for Coin Sciences, says that many DeFi projects can be pressed to accept the KYC procedure in 2021. And that’s sad because it violates every principle of decentralization. Last year, the USA already stated their intentions to start using tools for analyzing smart contracts. Sorry to disappoint you, but it wasn’t an accident. So, services will have nothing left but to take into account the conclusions of regulators in the foreseeable future.