DeFi needs regulatory clarity to interface with real-world finance

Decentralized finance protocols and regulatory agencies need to figure out DeFi regulations to enable the niche crypto market to integrate with real-world finance. Rune Christensen, founder and CEO of DeFi bluechip MakerDAO, says the decentralized finance space is set to move from its current isolated bubble phase toward more integration with the broader financial landscape. Christensen made this known during Tuesday’s plenary session “Behind the Decentralized Finance Hype” at the ongoing Global Technology Governance Summit organized by the World Economic Forum.

According to the MakerDAO CEO, DeFi protocols interacting with real-world assets, such as commercial real estate and trade financing, will require significant regulatory input, stating:

“The huge difference between the primordial soup of DeFi building and DeFi in the real world is that now you have to engage with regulation and laws.”

Indeed, the dematerialization of securities is an already existing example of the emerging asset tokenization trend. Countries like Germany and Switzerland have already created legal frameworks that allow tokenized securities to fall under the same regulatory compliance requirements as traditional investment instruments. With regulatory agencies in the mix, Christensen acknowledged that DeFi’s entry into real-world financing might proceed significantly slower than the march of progress that took the niche market segment to a $100-billion valuation.

For Aušrinė Armonaitė, Lithuania’s minister of the economy and innovation, regulatory agencies need to adopt a “teach more, punish less” approach to dealing with frontier financial technologies like DeFi. 

Speaking during the session, Armonaitė stated that regulators and government agencies should be alive to the uniqueness of the DeFi space even beyond fintech. According to the Lithuanian minister, regulatory bodies need to engage in constructive dialogue with DeFi stakeholders to achieve middle-ground regulatory provisions that ensure investor protection while not stifling financial innovation.

DeFi regulations are increasingly becoming a topic of conversation among many stakeholders, with regulatory agencies reportedly looking toward policing the growing ecosystem.

Back in March, the Financial Action Task Force published an updated version of its draft guidelines for cryptos with significant implications for the DeFi space. The document likely signals the growing intent among regulators to implement Know Your Customer compliance protocols for DeFi platforms.