November 21, 2023

Are you DeFi?

by Soham Panchamiya and Pankhuri Malhotra

in Articles


DeFi companies are frequently of the view that no regulation can or should apply to them because, well, they’re decentralised. What can a regulator do to make a protocol that is under no one’s and everyone’s control comply with regulations? Also, on what basis could it make the DeFi project comply if everything was self-custodial?

The follow-up question to that is pretty straightforward: are you really DeFi?

The concern is how much control do you exert over the protocol? Can you still control it at the back end? Do you have admin login? How truly immutable is the protocol once monies are staked? Are you in control of all the nodes underpinning the protocol and are actively paying for others to establish more nodes?

Essentially, if you’re a start-up building a DeFi project, you’re not decentralised, but the goal is to become sufficiently decentralised once you’re big enough and your community is active enough.

But what that also means is that you are centralised in your activities in substance, in which case, regulations may still apply to you until you get to that point of sufficient decentralisation. Speak to your legal advisors and make clear what you do now and not just what you hope to achieve in the future to understand what, if any, regulatory impact there is for your actual or proposed activities.

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