Last week at DC Fintech Week in Washington, DC, I moderated a conversation about how decentralized finance (DeFi) projects can comply with various regulations.
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Are developers responsible for how their projects are used? Can they prevent their projects from being exploited by criminals? In other words, is regulated decentralized finance an oxymoron?
why is it important
Developer responsibility for how decentralized projects are used is already the subject of several criminal cases in the US and elsewhere (see, for example, the case against Tornado Cash developers Roman Storm and Alexey Pertsev). Without going into the details of these cases, there are broader general questions about how far developers can go to prevent their projects from being used by malicious actors, and how far regulators can design guide rails for DeFi.
I had the opportunity to discuss this during a panel discussion at DC Fintech Week on Thursday with Maha El Dimaki, Director of BIS Innovation Hub’s Singapore Center, Yaya Fanusi, Global Head of Policy at Aleo, and Lee Schneider, General Counsel at Ava Labs.
break it down
Compliance and decentralized finance sound inherently contradictory. Users should be able to use a truly decentralized protocol for any purpose, and project developers should not have the power to interfere with these transactions. At least that’s one theory. Another is that developers are or should be required to prevent dangerous actors from exploiting their projects.
Developers can and should include certain tools and features to ensure compliance with specific regulations, and the speakers on this panel seemed to agree, with some caveats.
The biggest of these caveats is that there needs to be some consensus agreement on how compliance is defined here.
Mr Fanuzy described developer obligations as “risk management” and said it would focus on problems developers might encounter, such as money laundering suspects or other malicious actors.
Another way to put this, Schneider said (to loosely paraphrase his comments) is that neither developers nor regulators want users to lose money. In that sense, both parties here are aligned in their goals for DeFi.
El Dimaki, who also previously worked at the UK’s Financial Conduct Authority, said the goal of how the rules around DeFi will be approached is outcome-based policymaking, with regulators looking to prevent malicious activity.
There seemed to be general agreement among the panelists that there are steps developers can take to avoid violating regulations, but as always, the devil is in the details.
Obviously this is an ongoing discussion and I’m interested in what you guys think. I would like to gather everyone’s opinions on the following questions.
- Is compliant DeFi a contradiction?
- DeFi means a global project. Is it possible for a truly decentralized project to meet the regulatory needs of every jurisdiction in which it operates?
- If a project is decentralized and open source, how do you stop a malicious attacker from building their own front end and stealing the protocol for their own purposes? And should developers be held responsible in some way in that scenario as well?
Please feel free to reply to this newsletter or email me directly with your feedback. I hope we can have a discussion after that someday. And of course, I’d like to thank the good people at the FinTech Foundation for inviting me to this conversation.
Wednesday
- 14:00 UTC (10:00 a.m. ET) The House Financial Services Committee is scheduled to hold a hearing with federal banking regulators. The hearing was postponed to Friday afternoon after Speaker Mike Johnson announced the House would remain in recess.
Thursday
If you have any comments or questions about what we should talk about next week, or any other feedback you’d like to share, feel free to email us at nik@coindesk.com or contact us at Bluesky @nikhileshde.bsky.social.
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See you next week!