In a world without borders and under code management, who, what and how is it regulated?

Grab your hats, boys and girls! This is a whole new world-a financial system without intermediaries, anyone can access it 24 hours a day with just a mobile phone and a wallet! As Julien Bouteloup said to me:

“In DeFi, what we are building is a completely decentralized technology, completely transparent, and run by mathematics. No one can beat it.”

He continued: “We are building on research papers, 40 years of research, basic research, discrete mathematics, and we are building a chain that no one can match. You can’t beat it. GitHub didn’t exist in the 90s. First of all. , We are moving at the speed of light because everything is open source and everyone can participate.”

related: DeFi literacy: universities accept decentralized financial education

A Novum Insights report in August pointed out that since 2020, the DeFi market has increased by 40 times, when the total value of DeFi was locked at about 61 billion US dollars (while the current TVL Standing About 165 billion U.S. dollars). The market value of stablecoins, an important part of DeFi, has grown to US$112 billion in the first half of 2021.

Huge gains are being made, but at the same time, DeFi investors are also losing money because DeFi is not subject to the supervision, mediation, intermediary, custody or verification of a central agency, and is only driven by smart contracts. Therefore, if the smart contract fails or is attacked, consumers will not be able to remedy it. Loretta Joseph, a global digital asset supervision expert, said to me: “Regulators protect consumers and investors. In DeFi, you don’t have any intermediary to supervise it, so it is completely P2P. The question is how it will be regulated in the future. People will be deceived. When people start to be scammed, the first thing they do is to complain to the regulator.”

related: Will regulation adapt to encryption, or will encryption adapt to regulation?Expert answers

In fact, since 2019, the DeFi agreement Lost about 285 million U.S. dollars Hackers and other vulnerability attacks.As experts say, most hacks are due to Developer incompetence and coding errorsThis is important when the industry is completely dependent on code.

related: The fundamental need to update the blockchain security protocol

Regulatory challenge

In an interview with Forkast.News in February, Hester Peirce of the US Securities and Exchange Commission said: “This will be a challenge for us, because most of our supervision methods are through intermediaries. When you truly build decentralized There is no intermediary when it comes to things. This is very useful for the resilience of the system. But when we try to enter and monitor to figure out how to do this, it’s much more difficult for us.”

Compared with government-supported fiat currencies, regulatory issues often revolve around the volatility of the encrypted market, money laundering and terrorist financing risks, the unregulated nature of the market, and the lack of recourse for financial losses. Irreplaceable tokens It is exploding, generating excitement, confusion, legal issues and huge benefits. The NFT market also attracts a large number of encrypted transactions, which may disturb regulators, who may treat large capital flows in the NFT as money laundering. At the macro level, the decentralization of the financial system and the ability to manage economic stability and protect consumer interests pose further challenges for regulators.

related: Unfungible tokens from a legal perspective

Go to financial institution Decentralized autonomous organization (DAO) is popular as a way to transfer encrypted currency across different blockchains. This supports crypto loans and income agriculture. According to conservative estimates, DAO Supervise More than 543 million US dollars. In DAO, information technology governance and corporate governance are the same thing. The organization is managed and operated by smart contracts, and is monitored and executed by algorithms. Code is both managed and executed. If the algorithm fails, who is responsible?

In a joint article titled “Regulating Blockchain, DLT, and Smart Contracts: The View of Technology Regulators,” a team of researchers Outline Some key points to consider: (1) Determine the importance of central points that can be used for supervision, such as miners, core software developers, and end users. They even increase the possibility that the government or regulatory agency will become a potential participant; (2) The issue of liability determination-will core software developers be held accountable? (3) The challenge of smart contracts that cannot be tampered with and lack of update capabilities; (4) The need for quality assurance and technical review procedures.

It is expected that exchanges and wallet providers will become the focus of attention of regulators. Decentralized exchanges allow users to trade directly from their wallets in P2P mode, without intermediaries. The Financial Action Task Force (FATF), the global money laundering regulator, has seen exchanges in their eyes. Civic Chief Compliance Officer Christopher Harding pointed out that FATF suggested A guide for suggesting DApps Will need to comply Country-specific laws that enforce FATF, AML, and counter-terrorism financing requirements.

related: Draft FATF guidelines for DeFi compliance

The London School of Economics and Political Science recently reviewed 16 major exchange platforms Established Only four are subject to major transaction-related regulation, so there is a clear gap.A project is now required to list on any major exchange Passed the audit, But meaningful security doesn’t stop there. Toby Lewis, CEO of Novum Insights, noted:

“Also, please keep in mind that smart contracts can be attacked. Even if they are audited, there is no guarantee that they will not be exploited. Do your own research before you start.”

In the open source environment of project development Average With a compound growth rate of 20% per year, finding the right time for supervision to protect people from risks, but without restricting innovation, is a classic problem To solve it. Some governments have solved the problem of achieving this balance through the use of regulatory sandboxes (UK, Bermuda, India, South Korea, Mauritius, Australia, Papua New Guinea, and Singapore), while others have directly enacted legislation (San Marino, Bermuda, Malta, Liechtenstein) .

Far from resisting regulation, leading DeFi figures see it as a mature part of the industry. In an interview with CointelegraphStani Kulechov, founder of DeFi lending platform Aave, said that peer review will be the future: “The auditors are not here to ensure the security of the agreement, they are just helping to discover things that the team does not know. Ultimately, it’s about peer review. We need to find As an incentive for the community, let more security experts enter this field.” In the same article, Emeliano Bonassi talked about ReviewsDAO, a peer review forum used to connect security experts with projects seeking reviews. Bonassi believes that this has the potential to become a learning opportunity where people with expertise can contribute to improving the security of the ecosystem.

Vemanti Group CEO Tan Tran suggested: “Looking forward, I do see the accelerated adoption of license-free financial products and service platforms. Anyone can use these platforms anywhere, but each platform will be controlled by a centrally controlled platform. Regulators manage to ensure accountability and compliance. This is not to stop innovation. More importantly, to prevent bad actors from taking advantage of immature consumers.” Expert opinions on DeFi to CointelegraphBlock.one CEO Brendan Blumer concluded: “The real winners in the digital economy will be those who take the long-term perspective and take the time to ensure that their products meet the requirements of jurisdictions and professional services.”

It seems that exchanges and software developers may receive the attention of regulators. We expect that regulators will seek ways to improve technical quality assurance processes and DeFi governance, and this can only be done together with the industry. Mark Taylor emphasized Regulators need to continue to work with crypto industry participants to protect consumers.

Julien Bouteluop explained: “We actually built everything that traditional finance has in DeFi, but it’s faster, more powerful, more transparent, and available to everyone here. It’s really different. This means Anyone in the world can access technology without anyone’s permission. I think it’s necessary to promote innovation and build a better world.”

In this global 24/7, borderless market, who, what and how do we supervise? This is a brand new ball game. Regulators and industry need to work together.

The views, thoughts and opinions expressed here are only those of the author, and do not necessarily reflect or represent the views and opinions of Cointelegraph.