One of the problems that inevitably arises as an industry grows is that it’s hard to tell if everyone is saying the same thing. Nowhere is the issue more apparent than in the debate between DeFi (decentralized finance) developers and financial regulators.
Will it be possible to reach a consensus at “Consensus 2023,” which began on the 26th? Probably not.
passing each other
U.S. financial regulators generally believe that cryptoassets clearly fit within existing regulatory frameworks. Rules for managing crypto assets are already in place.
That’s why Chairman Gensler of the U.S. Securities and Exchange Commission (SEC) has called on crypto asset companies to register with the SEC, and the Financial Crimes Enforcement Network (FinCEN) has called on the entire industry to implement stricter customer verification ( KYC) and anti-money laundering (AML) requirements apply.
With exceptions, the industry has argued that cryptocurrencies do not fit the “Howey test.” The Howie test is a measure used by the SEC to determine whether a financial instrument is a security. Simply put, it is based on “whether the general public who invests expects profits based on the efforts of others”.
Perianne Boring, founder and CEO of industry group Chamber of Digital Commerce, who took the stage on the main stage of Consensus 2023 on the 26th, sees this as a problem.
Terms like “community” and “collaboration” are often used in the crypto world, but have different meanings for industry players and regulators.
“What do you mean by collaborating?” Boring asked.
For the SEC, the answer doesn’t matter. “The law kicks in,” Boring said, when people organized to develop a system that could have value. At least on stage, he didn’t seem to believe that the differences could be resolved by lobbying or voicing opinions on the proposed guidance.
That said, you don’t have to be completely discouraged. Salman Banaei, Head of Legal at Uniswap, a decentralized exchange (DEX), and Nathan Cha, Head of Marketing at dYdX, a blockchain-based credit marketplace. In a panel discussion with Sydney Powell, co-founder of Maple Finance, which deals with was confident that regulators would come to understand the power and purpose of DeFi.
Regulators and DeFi advocates have the same goal. Both want to make the financial system more transparent (that doesn’t mean all non-custodial, permissionless apps will eventually add KYC procedures). DeFi can do programmatically what regulators are trying to do in regulatory language.
The following discussion may sound familiar. So DeFi brings real-time audits, immutable transaction records, and the ability to easily track users. DeFi users may not be identified immediately, but given the time and resources, they can be tracked down. And that is the job of financial regulators.
More than just a blurb, Mr. Vanaei had the stats. According to the Financial Action Task Force (FATF) on Money Laundering, the seizure rate of illicit assets within the traditional financial system is around 0.1%. According to Vanaei, crypto assets account for 27%.
This is not to say that crypto-assets have become hotbeds for financial crime. According to Chainalysis, very few cryptocurrency transactions are associated with criminal activity. So if governments are concerned about terrorist financing or money laundering, they should welcome the unparalleled transparency that cryptocurrencies bring.
After all, the crypto industry and the regulators who want to oversee it are heading in the same direction.
｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
| Image: Panel discussion at Consensus (Shutterstock/CoinDesk)
｜Original: Crypto and Regulators Are Speaking the Same Language When It Comes to Financial Transparency
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