DeFi looks set to forge democratic future


The financial markets regulators in the United States are an organized bunch.

In fact, they are so organized that they have mastered the electronic surveillance of the entire Wall Street investment banking powerhouse, as well as the futures industry and even the over-the-counter derivatives business.

All three are very different, yet the US is the largest and most powerful center for all of these methods of trading the global multi-asset markets. That is why there are three very long established and knowledgeable regulators, and the exchange and futures market regulator has actual law enforcement powers and is headed by senior politicians and Senators.

The regulator being referred to here is the Securities and Exchange Commission (SEC) and one of the key differences between the SEC and almost any other regulator in the world is that the SEC is led by elected government officials with great levels of seniority.

It should therefore be of great interest that regulators of this level of high standing are beginning to take notice of decentralized finance, known by its acronym, DeFi.

The current consensus appears to be that authorities and lawyers are juxtaposed, and that there is some degree of understanding that the SEC and the CFTC are beginning to debate the possibilities of a future in which blockchain projects that have no middle-man have grown at such a speed that they may not be able to keep up with the pace of change.

On one hand, the DeFi projects that currently exist serve as a very important insight into the financial world of the future, and should be heralded by the investing public as a way toward a completely democratic financial services ecosystem in which, unlike a bank or brokerage account, a government-issued ID, Social Security number, or proof of address are not necessary to use DeFi.

More specifically, DeFi refers to a system by which software written on blockchains makes it possible for buyers, sellers, lenders, and borrowers to interact peer to peer or with a strictly software-based middleman rather than a company or institution facilitating a transaction.

In simple terms, this puts the public in charge and right now, when banks and governments are attempting to exert power over people, the fast-evolving nature of DeFi holds hope for a future of financial freedom and huge possibilities for a lot of people.

At the end of last week, regulators turned to fast-growing DeFi and blockchain startups to learn more about a part of the market that has been thus far more or less ignored.

During a series of video calls, various decentralized derivatives and futures venues spoke at length to senior regulatory officials, which is very interesting on the basis that the usual method for US regulators is to formulate their framework and then lay it out; anything falling outside that framework then gets taken to task.

In last week’s calls, however, things were very much different. Regulators were keen to speak to DeFi proponents and lawyers, as well as developers and trading venues. This is very encouraging indeed.

DeFi, which extends the decentralized nature of financial products past cryptocurrency and operates within the insurance, savings and trading sectors is such a fast-moving methodology that regulators in the US are reliant on the owners of blockchain technology companies to form any future rules.

Some advocates have railed against any early stage rulings, but it is always proper, pragmatic regulation that creates sustainability.

There is nothing wrong with using decentralized systems to bypass traditional intermediaries such as banks, which are very expensive when conducting international transfers, for example. They are equally expensive at the other end of the scale – FX market making – and therefore derivatives trading on decentralized networks is hugely on the up.

Just a few days before the calls, SEC executive Hester Pierce showed his proponency by saying “I don’t want it to be an enforcement-based approach. If we can provide clarity around certain issues within DeFi, that’s something we should do. There are certain obvious things: If you’re a decentralized platform that’s actually centralized, then probably the securities laws are going to apply.”

It is clear that regulators will want to work with DeFi pioneers, as they will likely see DeFi as an intrinsic part of the future of financial markets.

Therefore, multi-asset venues that have gone down the route of operating a regulated business from the outset in jurisdictions that fully understand the cryptocurrency and digital financial services sector are ahead of the curve.

CoinMetro has been regulated by the Estonian Financial Supervision Authority since its inception.