Expert Says Regulation is Coming to DeFi

There has been unrelenting debate about the sustainability of proper regulatory frameworks for crypto, since the controversial ‘travel rule’ was introduced by the Financial Action Task Force, or FATF for businesses operating in the crypto space. However, some experts believe that the experience of the industry with the FATF guidelines is just the beginning and have hinted at more challenges that are expected to raise their heads in the future. On November 18th, during the ending panel of the V20 conference, a senior partner at XReg Consulting, Siân Jones stated that there were implications of the collision between older models of regulations and the new and decentralized models of finance. 

She said that neither the crypto community nor the regulators were ready to handle these implications head-on. XReg Consulting is essentially a group of former regulators with practical experience when it comes to developing regulation and policy for crypto assets and blockchain. Jones said during the panel that the overall framework of the FATF for keeping money laundering in check, along with its travel rule, belong to a completely different technical and operational era. These were the years when globalized transactional finance had taken off and structures like SWIFT had been adopted.

239 banks spread out over 15 countries were the founders of SWIFT and Jones noted that all of them were a part of a banking industry that was quite mature, along with being well-funded. In contrast, the entities that have been defined as Virtual Asset Service Providers (VASPs) by the FATF, all hail from a less established and younger space. Therefore, implementing the travel rule and expected that it can be implemented so swiftly by these businesses doesn’t make sense. Ignoring the significant difficulties, Jones said that no matter how narrow FATF’s framework may be, it could still be reconciled with some parts of the crypto space that have been ‘industrialized’. 

However, over time, most of the entities in this space are trying to restore the original goals of cryptocurrency that began in the form of projects like Bitcoin and Ethereum. The nascent space of DeFi (decentralized finance) is also an attempt to return crypto to its original goals. As this space continues to grow, major parts of crypto are once again going to fall out of intermediated structures. Jones said that DeFi users, developers and regulators all need to wake up. The original goals of crypto and the decentralized space for crypto, all want to realize trustless transactions, which puts them at direct odds with how the FATF plans on preventing money laundering.

According to Jones, DeFi users and developers would have to come together and unite their voice to give feedback to the FATF. She said that whether people like it or not, regulation is coming to the decentralized finance (DeFi) space. But, if they feel that the framework, such as the travel rule by FATF, are not suitable for the space, then they will have to make the case themselves. She said that regulators will also have to recognize that older models of regulation don’t work for this space.