For DeFi to Flourish, Right-Size the Regulators

Shakespeare wrote in “Henry VI:” “the first thing we do, let’s kill all the lawyers.” If you work in DeFi in 2023, you’ve likely heard similar grumbling directed at regulators. Gary Gensler may as well be the King of France.

This op-ed is part of CoinDesk’s State of Crypto Week sponsored by Chainalysis. Matt Luongo is the CEO of Thesis, a venture studio and auditing firm which has built a family of projects across fintech, DeFi, infrastructure, and zero-knowledge cryptography such as Fold, tBTC, Taho, Etcher and Embody.

The fundamental complaint is the same as in the Bard’s day: that “parchment, being scribbled o’er, should undo a man.” Or in this case, an industry.

See also: IRS Proposed Rule on Digital Asset Broker Reporting Could ‘Kill’ Crypto

I’ve spent years building and developing projects in Web3. This technology can make billions of people’s lives safer, richer and easier to navigate. So I share the frustrations of many at the recent heavy-handedness of regulatory bodies.

Decentralization and on-chain transparency lend themselves to regulatory efficiency

This year has already seen a broad assault on crypto, with the U.S. Securities and Exchange Commission (SEC) suing both Binance and Coinbase and refusing to admit defeat in its fight against Ripple. The case against Coinbase is particularly baffling, since the same SEC that’s now accusing the crypto exchange of malfeasance only a few years ago approved its Nasdaq listing.

In the U.S, the approach seems to be to enforce first and figure out the rules second. This must change.

But where does the change start? How can this challenge be overcome?

Tech is about disruption, and some argue that decentralized tech itself will eventually make regulators obsolete. If rules can be written into code, the argument goes, human enforcers and the biases they bring will no longer be needed. Trust me: if it was possible to replace the SEC with code, I would in a heartbeat.

But it’s not possible. The world needs regulators. It just needs to right-size them.

First, do no harm

We need to start with a simple question: what is regulation for?

Constructive regulation helps ensure that people do not abuse their positions to cheat, steal or harm others. Enforcement should ensure that everyone is playing by the same rules. At its most…