Decentralized finance (DeFi) protocols are set to endure despite government and corporate attempts to enforce traditional financial regulations aimed at creating restrictive digital systems, according to Will Reeves, CEO and co-founder of Bitcoin (BTC) rewards platform Fold.
Reeves shared with Cointelegraph that regulatory measures mandating DeFi protocols to integrate biometric identity verification into smart contracts, or similar traditional financial (TradFi) regulations, will ultimately fail, much like previous efforts to control information dissemination on the internet.
He cautioned that governments and established financial institutions will leverage TradFi incentives to steer individuals towards permissioned custody via conventional investment vehicles like exchange-traded funds (ETFs), which offer advantages over direct crypto holdings, such as eligibility for collateralized loans. He stated:
“This is simply a chapter that will lead to an inevitable victory for these open networks. Over time, they will win, but along the way, you’re going to see regulations and things meant to delay progress.”
Reeves told Cointelegraph that entrenched financial institutions are advocating for regulations to hinder innovation while they prepare to enter the crypto space over the coming decade.
Despite this pressure, safeguarding open-source software developers from legal repercussions is paramount to protecting permissionless financial protocols from centralization and regulatory encroachment, he emphasized.
Related: US Treasury’s DeFi ID plan is ‘like putting cameras in every living room’
Financial Institutions and governments enter the crypto world
As traditional financial entities increase their involvement in crypto and call for stricter government oversight of the sector, privacy and financial sovereignty advocates express concerns that heightened scrutiny may compromise the fundamental principles of crypto and DeFi.
DeFi protocols aim to democratize finance and include the unbanked, enabling anyone with a mobile phone and internet access to transfer value and risk through an open, global financial system.
Imposing government-issued credential checks or other know-your-customer (KYC) requirements on DeFi protocols jeopardizes permissionless access, decentralization, and raises financial surveillance concerns, critics argue.
These threats would render crypto and DeFi indistinguishable from the traditional financial system they were intended to replace, critics of such policies maintain.
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