Decentralizing Finance

5Regulation

DeFi presents a panoply of opportunities. However, it also poses important risks and challenges for regulators, investors, and the financial markets. While the potential for profits attracts attention, sometimes overwhelming attention, there is also confusion, often significant, regarding important aspects of this emerging market. Social media questions like “Who in the U.S. regulates the DeFi market?” and “Why are regulators involved at all?” abound. These are crucial questions, and the answers are important to lawyers and non‐lawyers alike. ‐ Commissioner Caroline A. Crenshaw, SEC, Statement on DeFi Risks, Regulations, and Opportunities

5.1 Introduction

I hope you've been convinced enough to think that DeFi has merit and significant potential, despite its risks. As an emergent technology, public blockchains enable a tremendous leap forward in global connectivity and value transfers, but also pose many questions and implications for how finance has been run in our modern era. While the technology may be different, human behavior largely remains the same. Market manipulation, insider trading, and other types of financial fraud were not invented by crypto. Much of the regulation that governs the financial industry has been a response to the various lessons learnt throughout history.

Some proponents of DeFi believe that regulation goes against the industry's fundamental principles. They argue that DeFi should remain free, internet‐based, and be allowed to innovate ...