During DC Fintech Week in Washington, DC last week, I hosted a conversation about how decentralized finance (DeFi) projects could comply with different regulations.
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The story
Are developers responsible for how their projects are used? Can they stop criminals from using their projects? In other words, is regulatory-compliant decentralized finance an oxymoron?
Why it matters
Developer liability for how their decentralized projects are used has already been the subject of numerous criminal cases in the United States and elsewhere (see, for example, the cases against Tornado Cash developers Roman Storm and Alexey Pertsev). Without going into detail about these cases, a broader general question arises: how much developers can do to prevent bad actors from using their projects, and how much regulators can design guide rails for DeFi.
I had the privilege of discussing this with Maha El Dimachki, Singapore Center Director of the BIS Innovation Hub, Yaya Fanusie, Global Head of Policy at Aleo, and Lee Schneider, General Counsel at Ava Labs, during a panel at DC Fintech Week on Thursday.
Break it down
Compliance and decentralized finance seem inherently contradictory. Users should be able to use a truly decentralized protocol for any purpose, and project developers should have no opportunity to interfere with these transactions. It’s at least a theory. Another reason is that developers are or should be required to prevent dangerous actors from profiting from their projects.
Developers could and should be able to integrate certain tools or features to ensure compliance with certain regulations, although the speakers on this panel seemed to agree, with some caveats.
The biggest of these caveats is that we need to come to a specific consensus agreement on how we define compliance here.
Fanusie said he would describe developers’ obligations more as “risk management,” focusing on problems they might encounter (suspected money launderers or other bad actors, for example).
Schneider said another way to describe this is that neither developers nor regulators want users to lose their money (to roughly paraphrase his comments). In this sense, both parties are aligned in their goals for DeFi.
And El Dimachki, who previously worked at the UK’s Financial Conduct Authority, said outcomes-based policymaking as regulators seek to prevent malicious activity is the goal of their approach to rules around DeFi.
There seems to be general agreement among the panelists that there are steps developers can take to ensure they don’t run afoul of regulations, but as always, the devil is in the details.
This is obviously an ongoing debate, and I’m curious what you all think. I would like to gather your thoughts on the following questions:
- Is Compliant DeFi an Oxymoron?
- DeFi involves global projects. Is it even possible for a truly decentralized project to meet the regulatory needs of each jurisdiction in which it operates?
- If a project is decentralized and open source, what’s to stop a bad actor from creating their own front end and exploiting a protocol for their own ends? And should developers still take some form of responsibility in this scenario?
Please feel free to respond to this newsletter or send me your thoughts directly. I would love to have a follow-up conversation at some point. And of course, I’d like to thank the folks at the Fintech Foundation for inviting me to participate in this conversation.
Wednesday
- 2:00 p.m. UTC (10:00 a.m. ET) The House Financial Services Committee is scheduled to hold a hearing with federal banking regulators. That hearing was postponed Friday afternoon, after House Speaker Mike Johnson announced the House would remain in recess.
THURSDAY
If you have any ideas or questions about what I should discuss next week or any other comments you’d like to share, feel free to email me at nik@coindesk.com or find me on Bluesky @nikhileshde.bsky.social.
You can also join the group chat on Telegram.
See you next week!
