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DeFi is next on regulators’ hit list

CNBC | Ryan Browne | Nov 4, 2021

Wild west of crypto - DeFi is next on regulators’ hit listThe fast-growing decentralized finance industry could be about to get a rude awakening.

Decentralized finance, or “DeFi” as it’s commonly referred to, is a trend in cryptocurrencies that first started gaining traction in 2020.

But with major hacks and scams plaguing the space this year, regulators are becoming increasingly worried about the risk of crime as well as harm to consumers.

Almost $90 billion has been deposited into Ethereum-based DeFi protocols so far, according to data from The Block.

Regulators have already started taking a tougher approach to the crypto industry.  Various countries have attempted to boot out Binance, the world’s largest digital currency exchange, for operating without their authorization. Since it has no official headquarters, Binance has so far managed to avoid scrutiny — though the company says it now wants to be a friend, not foe, to regulators.

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Meanwhile, Coinbase in September got into a heated war of words with the U.S. Securities and Exchange Commission over a planned interest-earning savings product, which the regulator felt looked too much like a security. Coinbase later dropped plans to launch the feature.

And just this week, a long-awaited report from the U.S. government called on Congress to introduce regulation for stablecoins, digital assets pegged to traditional currencies like the dollar to maintain a stable value.

Now, DeFi appears to be next in line.

Earlier this year, the Wall Street Journal reported that the U.S. Securities Exchange Commission was probing decentralized crypto exchange Uniswap, with officials seeking information on how investors use the platform and the way in which it is marketed.

In September, acting U.S. Comptroller of the Currency Michael Hsu likened DeFi activity to controversial practices in Wall Street that led up to the 2008 financial crisis.

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“While DeFi protocols may offer similar functionality in financial transactions, they offer virtually none of the oversight that regulators require to ensure safe and efficient financial markets,” Rick McDonell, former executive secretary of FATF, told CNBC.  “The lack of effective surveillance creates a substantial risk for fraud, money laundering, sanctions evasions and other criminal activity within these markets.”

“Regulatory officials have made two things clear: they are supportive of the benefits that blockchain technology can confer on end-users, but they are not ready to trust the sector’s ability to manage its financial-crime risks.”

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