One of the most (over)used words to explain why we have crypto-based financial and economic systems is disruption. Disruption of the traditional systems, disrupting the closed-loop economies, disrupting the financial hold of the elite, and so on.
Ever since Bitcoin started gaining traction, regulators have been crying foul. Their perspective has merits. A whole new financial system that is not controllable, no person or organizations that can be held accountable and if things go south, there are no rules to protect investors.
On the other hand, cryptos (and specifically DeFi) came about from a need to break away from it all. Satoshi Nakamoto’s first-ever mined block contained a message, “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” The message was referencing the 2008-9 banking crisis that saw governments scrambling to save financial institutions from going bankrupt in a situation that was essentially created by their own greed. The effects were devastating, with US household alone losing an estimated $16 trillion. Since then, cryptocurrencies and DeFi have been a symbol of distrust for many towards centralization and the current financial model.
In short, DeFi and regulators have locked horns ever since.
Regulators will always play catch up
Modern DeFi, with different instruments such as lending, liquidity mining and farming is vastly different from legacy finance, and that is, at its core, the main issue for those who regulate the financial space. The unique implementation of the technology and its financial applications have outpaced regulators.
What they don’t understand is that it is near impossible to regulate software - especially decentralized software. While regulations can be applied to firms and how they operate, this approach can essentially be rendered useless when it comes to lines of code. DeFi depends on smart contracts that are fully automated and require no human intervention. Regulators cannot order software to stop what it’s doing. They can certainly go after the creators and operators, but decentralization means there is no single point of contact or entity they can put pressure on, so DeFi will continue to go on.
Another issue authorities face is that DeFi is not contained within physical borders. A global phenomenon, the regulators can only limit users within their particular jurisdiction. The SEC, with all its might, can only wield power over the United States. The rest of the world is an open opportunity for all.
The latest decision by El Salvador to accept Bitcoin as a legal tender (AKA money) is a prime example. While countries like India continue to have an indecisive approach towards it, the South American country’s residents can now freely trade, buy and sell using the largest cryptocurrency. Two vastly different stances from two countries.
While both sides take strong stances, the fact of the matter is that acceptance on either side (preferably a compromise on both) is the only way forward.
Regulators need to understand that, unlike different fads that come and go, DeFi is not going away any time soon. The authorities must look at DeFi and update their laws and regulations to accommodate. Traditional rules lack too much to even begin covering DeFi and cryptos.
On the other hand, DeFi players also need to soften their stance. The best thing they can do right now is to create products and services that fall in line with regulatory authorities. There has to be give and take on both sides.
One such good example is EQIFI, a platform powered by a licensed bank in EQIBank that merges the best elements of both DeFi and CeFi. EQIFI Essentially creates a bridge allowing consumers to enjoy the benefits of DeFi while still retaining the peace of mind that the platform they’re trusting their money with is backed by a regulated and licensed bank.
Jason Blick, Chairman of EQIFI commented “From our perspective, working with a licensed institution brings a sense of safety and responsibility, and we can offer products that are not already out there.”
While still being completely regulation friendly, EQIFI retains the essence of DeFi. Its EQX token gives users complete governance, where they can vote on any proposals put forward, essentially able to control the direction of the platform, new services etc. Merging both worlds also enables EQIFI to offer unique services, including extremely low interest rates by eliminating the middleman, potential access to multi-currency debit cards that support both fiat and crypto, and even a yield aggregator.
EQIFI CEO Brad Yasar believes that “by not carrying legacy banking issues forward and applying decentralized financial products to reduce overhead and expenses, we aim to solve some obvious issues, such as negative rates, access to products, and high cost of operations. However, that is just the beginning. We plan to expand from there.”
Though not the ultimate answer, EQIFI shows that DeFi protocols can operate within the regulated world of finance and co-exist with the very regulators who have been at loggerheads with the crypto space for so long.