We’re set to see historical regulation of cryptocurrency, with many questions on how this will impact DeFi. I cover some of the latest crypto policy news, why it matters, recent policy debates and share my interview with advocacy organisation the DeFi Education Fund (DEF).
Key Takeaways
- DEF believes we could see one piece of legislation by year-end (but this has decreased in likelihood).
- DEF concedes DeFi could be roped into unfit regulation, and front ends could bear the burden. The focus is on not including DeFi in any centralised exchange regulation.
- The collapse of FTX could likely draw more aggressive regulation.
- Crypto regulation matters as lack of clarity is a huge barrier for new market entrants, innovation and launching cryptocurrencies.
DeFi Education Fund Interview
Last week, I spoke with Miller Whitehouse-Levine, Policy Director at the DEF, which was born out of a Uniswap governance proposal and advocates for positive DeFi regulation.
A few core takeaways for me included
- One piece of crypto legislation in the U.S. is likely by year-end.
- The next U.S. bill will either regulate stablecoins or oversee centralised exchanges via an upcoming bill called the DCCPA.
- Unknown if DeFi protocols will be dragged into unfit regulation alongside centralised exchanges.
- Attitude towards DeFi by regulators is not optimal.
- Europe is making serious ground with regulation, with DeFi next on the horizon.
- A legitimate chance that DeFi in its current state could become ‘non-compliant’ (worst-case scenario).
- Unclear whether DeFi front-ends will bear a heavy burden and be forced to licence.
- DAOs remain in an uncertain zone.
The Latest Policy News
There’s recently been a lot of important policy and regulatory news that’s worth following:
- SEC Chair Gary Gensler continued to label most cryptocurrencies “securities”, especially those based on proof of stake (PoS).
- SEC language in court documents arguing Ethereum falls in its jurisdiction because most transactions happen in the U.S.
- Ripple vs the SEC case remains hotly contested and entering the tail-end of a 2-year-plus trial. This is a monumental case with critical implications.
- Commodity Futures Trading Commission (CFTC) sued a DAO in a landmark case, targeting entities behind the DAO.
- The UK to bring crypto in line with financial assets with a draft bill passed in late October.
- First-ever U.S sanctions on a DeFi smart contract (Tornado Cash).
In big news today, cryptocurrency LBRY lost its SEC case, with the judge potentially setting some bearish precedent for crypto-assets, citing ‘pre-mining’ tokens as a significant reason.
Crypto Regulation Debates
The surge in crypto policy news triggered substantial crypto and DeFi regulation debate in the last few weeks. FTX CEO Sam Bankman-Fried (SBF) suggested a framework for crypto legislation. Bankless also hosted a great conversation with SBF and Erik Voorhees on the topic.
Some takeaways include:
- Crypto regulation is coming; not a matter of if but when and what this looks like.
- Introducing ‘blacklists’ for sanctioned addresses.
- DeFi regulation should be separate laws and not included in any centralised exchange policy.
- Better disclosure and transparency for token activity.
- Industry standards for exchanges to handle hacks.
- Refusing to rule out front-end protocols requiring a broker-dealer licence.
- How regulated broker-dealers or financial institutions access DeFi.
- SBF is not optimistic that any trade-offs won’t happen; front-end regulation may be a concession to keep protocols permissionless. Eric believes this goes too far and should be preserved at all costs.
Impact of FTX Collapse
Since I interviewed DEF, FTX suffered a historic collapse. But it’s worth keeping Sam’s thoughts on policy up.
SBF was a core advocate and person at the table championing crypto policy.
The collapse will likely significantly impact future crypto policy-making. Some U.S senators are already calling for “more aggressive enforcement.”
Why It Matters?
Currently, the barriers to launching a cryptocurrency in the U.S. are high and fraught with legal danger and uncertainty. Potentially stopping innovation and cryptocurrency issuers from entering the U.S. market.
There is no clear way to launch decentralised crypto-assets and networks in the U.S.
Getting clear guidelines on how to launch crypto-assets could fuel greater adoption in the long run. As explained previously, I believe that greater regulation can fuel greater adoption and that this could benefit Bitcoin the most.
I anticipate some stricter laws on DeFi. Ultimately, governments have immense power that could tangibly impact many cryptocurrencies. It remains unclear how far they will go. We’ll continue to report and keep members in the loop.