Congress begins crafting DeFi policy Tuesday as the White House’s policy approach to DeFi allows regulators to send mixed messages to the industry.
Posted on September 9, 2024 at 11:30 a.m. EST.
The first-ever congressional hearing dedicated exclusively to DeFi is scheduled to take place Tuesday at 10 a.m. ET.
Rep. French Hill (R-AR), chairman of the Financial Services Subcommittee on Digital Assets, FinTech, and Inclusion, is hosting a congressional hearing titled “Decoding DeFi: Analyzing the Future of Decentralized Finance.” This hearing could represent the “maturing” of DeFi as an industry that is now leading lawmakers to consider what the right policy approach should be.
Hill told Unchained in an email Monday that he believes DeFi “can deliver a better financial system through permissionless peer-to-peer technology and holds great promise for preserving an individual’s freedom to transact.” But he criticized the Biden administration for how it has approached the sector so far.
“Instead of taking a thoughtful approach to regulation, the Biden-Harris administration agencies continue to use rulemaking and enforcement measures in a shoddy jurisdictional attempt to capture and kill DeFi,” Hill wrote. The congressman is in the running to become the next House Financial Services chair if Republicans retain control of the House in November.
Witnesses scheduled to testify at the hearing include Amanda Tuminelli, chief legal officer at DeFi Education Fund; Rebecca Rettig, director of legal and policy at Polygon Labs; Peter Van Valkenburgh, research director at Coin Center; and Mark Hayes, senior policy analyst at Americans for Financial Reform. More information about the hearing can be found here. here.
The hearing comes as regulators and a law enforcement agency in the Biden administration have taken actions on DeFi that appear to contradict each other, or at least differ in terms of whether they are positive or negative about DeFi. The lack of a unified position suggests that the Biden administration does not yet have a specific position or policy on DeFi, according to two industry sources.
Biden Administration Sends Mixed Messages on DeFi
While the hearing appears to be a positive sign from the administration on DeFi, recently various agencies have taken actions that suggest a lack of a coordinated approach.
On Tuesday, the Federal Bureau of Investigations (FBI) released a helpful statement public service announcement to the DeFi community notifying that “the Democratic People’s Republic of Korea (“DPRK” aka North Korea) is conducting highly targeted and hard-to-detect social engineering campaigns against employees of decentralized finance (“DeFi”), cryptocurrency, and similar companies to deploy malware and steal company cryptocurrency.” Two industry sources considered this move to be a very reasonable action in line with DeFi industry standards.
Read more: Silence on cryptocurrencies in new Democratic platform contrasts with Trump and GOP’s pro-crypto stance
However, on the other hand, on Wednesday, the Commodity Futures Trading Commission (CFTC) issued an order to file and settle charges against Uniswap Labs as part of its ongoing enforcement efforts in the digital asset decentralized finance (DeFi) space. The enforcement action, in the amount of $175,000, for a violation that Uniswap Labs quickly remedied in September 2023 after considering other enforcement actions, was considered unreasonable even by at least one of the CFTC’s own commissioners.
These mixed messages from regulators could indicate that there is no specific White House position or policy on DeFi yet, according to two industry sources. As of September 2022, the White House common a framework for the responsible development of digital assets which included an assessment of illicit financial risks linked to decentralized finance released in April 2023. Unchained reached out to the Biden administration for comment regarding any updated guidelines or policies for DeFi, but did not receive a response.
The Downsides of Enforcement Regulation for DeFi
At the CFTC, not all five commissioners were in agreement on the Uniswap settlement, as two CFTC commissioners issued dissents on the order. In an interview with Unchained, CFTC Commissioner Summer Mersinger, when asked if she felt there was a coordinated policy on DeFi from the White House, said she was “not sure” whether Uniswap or any of the other DeFi cases were part of a coordinated effort. As for whether the CFTC is pursuing regulation through enforcement, Mersinger added, “If we’re going to go down that path…whether we’re led by someone or not, let’s do it in a way that we engage with the industry, we have the conversation, and we provide clarity. That doesn’t seem to be the path we’re going down at this point.”
Read more: Trump’s new DeFi project could attract hackers
Mersinger also raised concerns about how Uniswap appears to have paid attention to three DeFi commands issued by the CFTC in September 2023 and stopped trading leveraged tokens at that time, but the CFTC still took that action against them. “So they (Uniswap) proactively looked at our (CFTC) rules, trying to respond, and then we brought the case for the period before that rule came out. So when you tell people that this is against our rules, and someone follows them so they don’t break the rules, but we still file the Uniswap case, there’s a fundamental fairness issue here that I think is also at play,” Mersinger said.
Mersinger encouraged the DeFi community to use their voice and share their concerns publicly and with elected officials. As for smaller DeFi protocols than Uniswap that may not have many resources, Mersinger highlighted a harsh reality for the US and DeFi, saying, “…some of these smaller protocols can’t operate under the threat of enforcement that says, ‘You can’t do this.’ Their option becomes shutting down or outsourcing, and that’s the only option we leave them.”
US Agencies Making Progress Toward Accepting Cryptocurrencies and DeFi
The FBI’s DeFi PSA provided useful insights into how DeFi workers are being targeted by the DPRK. “This announcement includes an overview of the social engineering tactics that North Korean state-sponsored actors are using against victims working in DeFi, cryptocurrency, and related industries; potential indicators of North Korean social engineering activity; mitigation measures for those most at risk; and steps to take if you or your company may have been a victim,” the PSA said. With this more collegial approach, two sources also point to this announcement as examples of how the FBI views crypto as a victim while the bad actor is the DPRK, not the technology or industry.
Read more: Trump vows to ’embrace’ crypto and Bitcoin in economic policy speech
Another example of the administration’s positive stance on DeFi is Treasury Secretary Janet Yellen’s decision last month to take proactive steps to combat DeFi. withdraw The self-hosted wallet regulation is seen by the industry as excessively onerous, impractical, and a threat to privacy. It would have required banks and money service businesses (MSBs) such as cryptocurrency exchanges to submit reports, keep records, and verify customer identities on digital asset transactions above certain thresholds. Janet Yellen’s proactive rollback of the self-hosted wallet regulation that was put in place under former Treasury Secretary Mnuchin is essentially a demonstration that people using their own cryptographic keys do not pose an illicit financial threat, according to one source.
UPDATE (September 9, 11:43 a.m. ET): Adds information about Congressman Hill.
