Misconception #2: “Everything in DeFi is unregulated.”
Truth: Regulation has an important role in the future of DeFi, and financial firms can use “Responsible DeFi” to create a better experience for consumers
A big misconception about DeFi (decentralized finance) is that it’s grounded in the lawless Wild West and can operate outside of a regulatory perimeter. The truth is, however, that when new technologies reach critical mass, regulations can serve as guardrails to manage the risks. When it comes to DeFi, one way to think about this is that DeFi is about code, and that code can be used for good…or for bad. One role of regulation is to try to minimize the bad, but it must do so in a way that doesn’t inhibit the good – such as greater participation in the financial system – presented by DeFi.
Think about the nature of paradigm change. Out on the frontier of innovation you find a handful of maverick inventors—often working in isolation—coming up with breakthroughs. Once their idea captures the imagination of a small number of risk-takers, the early adopters jump on board. DeFi started with a few people writing open-source code and putting it on the internet for anyone to use. They literally could not get bank accounts—so they wrote software that does what a bank does. It worked. As with any innovation that generates enough buzz and functions as designed to gain traction, the way DeFi has, regulation eventually follows and, if balanced so as not to cripple innovation, drives large-scale acceptance.
To put today’s DeFi into perspective, around 200 million people are involved in crypto, and a fraction of them are in DeFi. Millions of users on any platform may sound substantial, but not when you’re talking about an internet-native technology with the potential to serve and help billions worldwide. Even at these numbers, DeFi is still in its infancy. At WisdomTree, we believe a clearer framework of regulations that empower technology, and the consumer confidence it can add, could be the biggest piece needed to give another 2 billion users the benefits of this tech.
So what steps are underway in DeFi regulation? The good news is that responsible providers are focused on making this a safe, trusted space for consumers. We know, through experience, that financial systems need regulatory guardrails. With an ETF, for example, an investor will receive information describing how each fund works, with transparent holdings, and related risk disclosure, and with traditional banking, activities are governed by tailored risk management programs and audits. When it comes to building the technological solutions for the DeFi space, WisdomTree is guided by these best practice processes and consumer protections.
We’re working so financial consumers who are excited about, and could benefit from, DeFi can expect accountability. We call this “Responsible DeFi,” and we strive to achieve it by evolving the tools necessary to democratize access to financial services in a responsible way.
Building all the solutions that replicate and automate these activities across an entire industry doesn’t happen overnight. This is typical of periods where new technologies take hold. Similar things went on in the late 1990s with the web. The internet was unregulated when it first came along. It took time to put those protections in place—and those protections are still evolving in different parts of the world.
DeFi may always be seen as a frontier because experimentation in the technology may be part of its continued growth. But those of us working to deliver DeFi to the mass market—and build a reputation as trusted providers in this space—know regulation and best practices are part of its evolution. We need to build the trust of everyday financial consumers before they move their money. This cannot happen in an unregulated Wild West.
Important Risks Related to this Article
This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees, or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.
