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Does decentralised finance equal deregulated finance?
Journal of Financial Compliance,
6
(2),
158-172
(2023)
Abstract
DeFi is a fast-growing sector of the blockchain ecosystem. In this paper, readers are introduced to key concepts in DeFi, including use cases for the technology, differences between permissionless and permissioned DeFi, and the respective advantages of participating in DeFi vs. CeFi platforms. Unlike CeFi, in which a central platform or party acts as an intermediary to facilitate crypto asset transactions, DeFi protocols and platforms rely on self-executing smart contracts to perform their functions and do not custody their users' assets. Accordingly, there are open questions as to how DeFi can be regulated. Indeed, some declare that DeFi should not be regulated. This paper analyses the key arguments in favour of and against regulation of DeFi in the context of the recent crypto asset market instability, including a breakdown of various theories of liability under which regulators seek to identify bad actors and penalise harmful activity. It then synthesises recent statements and enforcement activity by US regulators, including the Commodity Futures Trading Commission, Securities and Exchange Commission, Department of Justice, Financial Crimes Enforcement Network and legislative activity, including President Biden's recent executive order, and the Lummis–Gillibrand Responsive Financial Innovation Act. To date, US lawmakers and regulators have viewed the label ‘decentralised’ with scepticism, applying a functional analysis to identify participants exerting various degrees of control over DeFi protocols in order to enforce regulations.
Keywords: DeFi; blockchain; crypto; regulation; SEC; CFTC
The full article is available to subscribers to the journal.
Author's Biography
Daniel J. Davis is a partner at Katten Muchin Rosenman LLP, and provides counsel on regulatory requirements for financial products ranging from cryptocurrencies to derivatives. Dan is also an experienced complex civil litigation attorney and advises clients on both judicial and administrative matters. He previously served as General Counsel for the Commodity Futures Trading Commission, where he regularly addressed issues in the crypto space while advising the agency and working with other regulatory bodies regarding the evolving technology. Dan's service was recognised in 2019 with the agency's highest honour, the Chairman's Award for Excellence. He was featured on Citywealth's ‘Top 15 US Legal Crypto Practitioners 2022’ list and was also named in The Legal 500 United States 2021 and 2022 guides. Dan graduated with High Honors from The University of Chicago Law School, where he served as Executive Editor of the Law Review. He received his BA, magna cum laude, from Brigham Young University.
Sheehan H. Band is a senior associate at Katten Muchin Rosenman LLP. He concentrates his practice on litigation and enforcement matters with a focus on the financial services industry and regulatory and internal investigations, including a particular emphasis on crypto asset and blockchain technology. Sheehan has represented companies and individuals in state and federal court as well as before various regulators, including the CFTC, SEC, CME and NFA. He also advises clients on the developing laws and regulations related to crypto assets and blockchain technology, representing clients involved in the crypto asset industry before various regulators. Sheehan also maintains an active pro bono practice, with a focus on wrongful conviction and asylum matters. He is committed to supporting diversity, equity and inclusion, both at Katten and in his broader community. Sheehan earned his JD from the University of Pennsylvania Carey Law School, has a certificate in Business Economics and Public Policy from the Wharton School of Business, and a BA from Washington University in St. Louis.
