Moving forward, decentralized finance (DeFi) will need a much more differentiated regulatory approach. For these and other DeFi projects, a universal regulatory approach is not only impractical but ineffective. The Web3 ecosystem deserves well-defined guardrails that continue to allow for innovation and advances in building technology while protecting users. Uncertainty loomed over crypto businesses in 2022.
DeFi, or decentralized finance, is one of the hottest new trends in the cryptocurrency industry. It seeks to build a more inclusive, fair, and open financial system using the power of decentralized technologies. Yet, its unprecedented character poses considerable regulatory hurdles.
Regulating DeFi with a one-size-fits-all framework is not the solution. The ecosystem is rich with colorful activity and interaction, and this cannot be overemphasized, multilayered platforms that demand unique solutions. While many of these concepts make sense in theory, regulators need to understand the unique characteristics of each DeFi project. They should not kill innovation in the egg with a heavy handed approach.
To compete on the global stage, the Web3 community needs an unequivocal regulatory framework. Such a system must strike the right balance by removing bottlenecks to innovation while still protecting users from unsafe practices in DeFi. Finding this balance will be key to the DeFi sector’s long-term growth and sustainability.
While regulatory scrutiny from the Biden administration has been made a cause for concern by some industry participants, they are concerned that if overly regulated, innovation would be suppressed and businesses would be forced to relocate outside the United States. Determining a proper balance between regulation and innovation is important.
In 2022, crypto businesses were already in a climate of extreme uncertainty given the regulatory upheaval seen in this space. As a result, most companies are lost in the sauce trying to determine all of the multi-jurisdictional convoluted and sometimes contradictory guidance. This decades-long lack of certainty prevented private investment and slowed progress and growth in this critical sector.
Particularly, experts call for an increased collaborative culture between regulators and industry participants. This method serves to build bespoke regulatory frameworks which meet the unique risks and challenges presented by DeFi. We believe this collaborative approach will incentivize innovation and better protect users.
As some of the leading lights of private sector innovation tell it, without clear and consistent regulations, innovation is stifled. These sensible regulations give businesses the regulatory certainty they need to operate and innovate responsibly. Teaching investors the rules of the road will go a long way toward attracting institutional investment and maintaining momentum for DeFi to go mainstream.
