Regulations Stymie the Development of Viable DeFi Models
Regulations Stymie the Development of Viable DeFi Models
There are those in the industry who argue we need regulation of the crypto space to provide “stability” or “clarity.” While it sounds reasonable on the surface, it’s actually looking at it backwards.
We believe what we really need is room for the crypto market and emerging technologies to sort themselves out, free from stifling regulation or arbitrary enforcement.
Or as Michael Casey at Coindesk put it, a safe harbor for ugly ducklings to grow. He notes a number of times when the crypto stumbled hard in early years.
“In 2013, when Bitcoin was four, its blockchain suffered an accidental hard fork as a failure to reconcile two versions of its code led miners to unknowingly start building two separate chains. One year later, an attacker exploited the so-called “malleability bug” to launch a crippling denial-of-service attack against the Bitcoin network while others used the same exploit to steal bitcoin from the doomed exchange Mt. Gox. Then, in 2016, two-year-old Ethereum faced a massive crisis when an attacker found a bug in the smart contract code for the decentralized investment project The DAO and drained it of $60 million worth of ether.
“In all three cases, the issues were resolved with the decisive leadership of core groups of Bitcoin and Ethereum developers. In the first and third instances, the interventions involved coordinating a rollback in the blockchain, with the consensus of users, to cancel transactions occurring after the attack. This speaks to the presence of some degree of centralization in these early phases of protocol development, when bugs and performance problems that clearly hurt the network need to be resolved efficiently.
…
“It is this evolved state of decentralization that, according to SEC pronouncements, appears to have made the current iterations of Bitcoin and Ethereum exempt from securities registration. Both now fail the part of the Howey Test that says an investment scheme is a security if returns for investors hinge on the work of a small group of people. Bitcoin’s founder and earliest adopters are out of the picture, and Ethereum’s founders don’t have the influence they once had to unilaterally push through changes.
“Here’s the problem: The SEC’s approach to these issues implies that Bitcoin’s and Ethereum’s transitional experience are the exception, not the rule…”
The solution?
“But if Bitcoin and Ethereum could grow into swans, what’s to say others can’t in the future? And shouldn’t policy incorporate the prospect of that transition from unavoidable centralized structure at initiation to a later decentralized structure that no one can effectively control? Enforcement actions can cripple otherwise high-potential projects; they can condemn them to permanent ugly duckling-hood.
We agree. The industry needs space to grow and mature without operating in constant fear of arbitrary regulation by enforcement. Regulations that would force centralization will worsen risk.
“If regulators keep imposing rules that favor centralization – as with the demands placed on crypto providers to block accounts using the Ethereum-based mixing service Tornado Cash … they will simply build the same risks into the system and hinder the development of viable decentralized models.”
Regulators need to let the ugly ducklings grow into swans.