Last week during D.C. Fintech Week in Washington, D.C., I facilitated a discussion on how decentralized finance (DeFi) projects might align with various regulations.
This is State of Crypto, a CoinDesk newsletter exploring the crossroads of cryptocurrency and government. Click here to subscribe for future editions.
The narrative
Are developers accountable for how their projects are utilized? Can they stop criminals from exploiting their projects? In essence, is regulation-compliant decentralized finance a contradiction?
Why it matters
The liability of developers concerning their decentralized projects has already been a focus of numerous criminal cases in the U.S. and beyond (for instance, the cases involving Tornado Cash developers Roman Storm and Alexey Pertsev). While we won’t delve into those specific cases, the overarching question remains: to what extent can developers prevent bad actors from misusing their platforms, and how can regulators establish guidelines for DeFi?
I had the honor of discussing this with Maha El Dimachki, the head of the BIS Innovation Hub’s Singapore Centre; Yaya Fanusie, global head of Policy at Aleo; and Lee Schneider, general counsel at Ava Labs, during a panel discussion at D.C. Fintech Week on Thursday.
Breaking it down
Compliance and decentralized finance may seem inherently contradictory. Users should have the freedom to utilize a truly decentralized protocol for any purpose, while developers should lack the capacity to interfere with transactions. That’s one perspective; another posits that developers ought to be responsible for preventing harmful actors from exploiting their projects.
However, panelists seemed to agree that developers can and should incorporate tools or features to comply with specific regulations, albeit with certain qualifications.
The most significant qualification is the need for a clear consensus on what we mean by compliance.
Fanusie suggested framing developers’ responsibilities as “risk management,” concentrating on potential issues they might face, such as suspected money launderers or other malicious entities.
Schneider commented that neither developers nor regulators desire to see users lose their money, emphasizing that both parties share aligned goals regarding DeFi.
El Dimachki, formerly with the UK’s Financial Conduct Authority, mentioned that an outcome-based approach to policymaking, wherein regulators aim to deter malicious activity, could guide the regulatory framework around DeFi.
There appeared to be a consensus among panelists that developers can implement measures to ensure compliance with regulations, but as always, the nuances are crucial.
This is clearly an ongoing debate, and I’m interested in hearing your perspectives on these questions:
- Is compliant DeFi a contradiction?
- Given that DeFi encompasses global projects, can a truly decentralized project meet the regulatory requirements of every jurisdiction in which it operates?
- If a project is decentralized and open-source, how can we prevent a malicious actor from creating their own frontend to exploit a protocol? Should developers be held liable in such a case?
I welcome your thoughts via email in response to this newsletter. I would love to have a follow-up conversation at some stage. A big thank you to the Fintech Foundation for inviting me to participate in this discussion.
Wednesday
- 14:00 UTC (10:00 a.m. ET) The House Financial Services Committee plans to host a hearing with federal bank regulators. This hearing was postponed on Friday afternoon after House Speaker Mike Johnson announced that the House will remain in recess.
Thursday
If you have thoughts or questions on topics to discuss next week, or any feedback you’d like to provide, please email me at nik@coindesk.com or connect with me on Bluesky @nikhileshde.bsky.social.
You can also join the group discussion on Telegram.
See you all next week!
