“The exciting thing about the Internet is it is decentralized.(...)
But nobody realized that any point of centralization
could be a weak spot, so had to be governed.
And for Internet people, requesting governance
is sort of… counter-cultural."
Tim Berners Lee, Computer scientist & inventor of the World Wide Web.
With the fall of FTX, regulation becomes
a hot topic
Depending on which side you are, the aftermath of the FTX’s fiasco is seen differently.
What is at stake, hearing the arguments of both sides, is a choice between two post-FTX collapse crypto futures: one is unregulated, uncompromising and pure, therefore marginal; the other is regulated, compliant and traded-off, therefore massively adopted.
Regardless, attempting to predict what the future will be is fruitless, random and definitely not our role. Much more mind nurturing and prospective would be to understand, in regards to the past, why and how decentralized finance could benefit from regulation.
This is the main purpose of this paper.
In essence, the financial system has had its historic dosage of risk exposure, sometimes almost bringing down the whole industry, and it was the regulation that lifted the public’s confidence and
trust to cautiously return. So, it is possible that the path trod by the banks many decades ago will be not that much different from the way that the crypto industry is marching into.
As during the infancy of the traditional financial system,
the risks associated with digital assets are legion
and can be as well financial
What can be done
As DeFi is a potential disruptive innovation,
an adequate regulation could catalyze
the next stage of its growth
Figure 2: Digital assets and DeFi: A potential for disruption
(sources: Analyse BlockZero (2022); Harvard Business Review (2015); PWC (2017)
Fortunately, the work should not be done on a clean slate.
First, crypto regulation could borrow
from financial regulation,
and build up from there.
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