The report offers a range of policy actions that can be adopted for DeFi, ranging from the introduction of new licence types and imposing prohibitive measures to doing nothing at all.
The WEF (World Economic Forum) has published a new paper to facilitate a better understanding of the benefits and risks of DeFi (decentralised finance) and aid in efforts to regulate the sector.
DeFi is a blockchain-based form of finance that does not rely on centralised financial intermediaries such as brokerages, exchanges, or banks to offer financial services such as lending, borrowing and trading. Some form of tokens are typically issued to those transacting on a DeFi platform.
The report notes that in the past year, the value of digital assets locked in DeFi smart contracts grew by a factor of 18, from USD 670 million to USD 13 billion. The number of associated user wallets grew by a factor of 11; from 100,000 to 1.2 million, while the number of DeFi-related applications grew from eight to more than 200.
The report offers a range of policy actions that can be adopted for DeFi, ranging from the introduction of new licence types and imposing prohibitive measures on the sector, to doing nothing at all.
“An effective regulatory response to DeFi is likely to involve a combination of existing regulation, retrofitted regulation and new, bespoke regulation,” the report says. While an emerging body of digital asset-specific law is growing, most jurisdictions are yet to adopt bespoke frameworks for DeFi.
The report notes that in the DeFi context, there may be no central entity performing the relevant activities that would traditionally be regulated. “The software developers and token holders may be easily identifiable, but not those occupying roles that are the traditional regulatory touchpoints.”
Even when operators can be identified, they may lack the ability to modify DeFi services or stop transactions because of the decentralised nature of the protocols, which involve smart contracts interacting with assets held by other smart contracts that are not directly associated with a particular user.
Regulators will need to assess who is responsible and when a locus of responsibility must be identified, which may be possible through careful analysis of services, even when they are nominally decentralised.
The borderless nature of blockchain networks and digital assets also poses challenges for DeFi regulation at the national and subnational levels, the report says.
It does not recommend any specific actions universally, but helps to identify potential approaches and important considerations for DeFi because financial regulatory regimes vary from jurisdiction to jurisdiction, as do policymakers’ judgments about the relative risks and rewards.
The report is available here.
Early this month, Thailand’s SEC (Securities and Exchange Commission) made its first official announcement about DeFi platforms, saying they may be subject to licensing requirements under the country’s law.