Last month’s proposal from Sam Bankman-Fried, CEO of crypto exchange FTX, for regulators to establish a litany of standards for the cryptocurrency industry poses an existential threat to decentralized finance (DeFi) platforms and entrepreneurial spirit. As one of a select few with the capital and clout to move the needle in the discussion surrounding crypto regulation, Bankman-Fried, also known as SBF, should be taking a stand to protect DeFi by directing regulators to where they’re urgently needed: centralized finance (CeFi) platforms and centralized exchanges (CEXs).
In a section of his blueprint for regulatory oversight and industry standards addressing DeFi, SBF affirms the importance of maintaining permissionless smart contracts and validators. He goes on to propose that DeFi front-end providers, website hosts and even related marketers be required to register as traditional financial brokerages.
The implication of such a classification would subject DeFi agents to a host of stringent regulatory policies and Know Your Customer procedures. Even hiring the highly specialized professionals necessary to manage relevant legal responsibilities requires enormous capital and resources.
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DeFi is intrinsically self-regulated. Any regulatory action would be redundant at best, and suffocating at worst. Nevertheless, anything resembling broker-dealer regulation would effectively crush DeFi’s entrepreneurial spirit and ultimately transfer DeFi Legos into the hands of a small group of centralized crypto powerhouses — namely, Binance and SBF’s FTX exchange.
Perhaps ironically, it is those very centralized platforms and their opaque operations that require regulation the most.
The Great Financial Crisis: A regulator’s dream come true
It would be infantile to suggest that regulation does not serve a purpose. Here’s what regulation does very well: It ensures that big players follow all relevant laws and injects transparency into the operations of otherwise opaque financial institutions. In short, regulation breaks down information asymmetry and prevents the big guys from colluding (and lying) to exploit the little guys, who can rarely see enough of the picture to make informed decisions.
The 2008 financial crisis showed citizens the world over that their economic well-being, livelihoods and life savings had been entrusted to massive financial institutions operating without restraint. In the…
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