The Regulatory and Legal Issues of Decentralized Finance
Posted: 12 Oct 2022 Last revised: 23 Mar 2023
Date Written: October 10, 2022
Decentralized Finance, known as DeFi (Decentralized Finance), refers to the use of blockchain and digital assets or crypto-assets for the provision of financial services. In this way, through DeFi applications, services such as loans, insurance, crypto-asset exchanges, among others, are offered, which are structured based on crypto-assets and through technologically decentralized applications.
This paper discusses the concept of DeFi and how it challenges the traditional market infrastructures of the financial sector, demystifying the idea of absolute decentralization, generally mentioned in the crypto-asset arena, from the perspective of decision-makers and governors of these decentralized applications. Subsequently, the paper analyzes the opportunities and challenges of DeFi for consumers, financial institutions, new competitors and financial regulators. Among the opportunities, the paper explains how DeFi could contribute to financial inclusion, to the automation of certain financial products and how it is a key factor for the development of metaverses. As part of the challenges, the paper analyzes the problems of money laundering and terrorist financing in these markets, financial consumer protection, corporate governance issues, the lack of transparency of these products, cybersecurity risks and systemic risk issues. Finally, the paper addresses some early regulatory responses that policymakers have tried in response to some of these challenges in different jurisdictions.
Keywords: DeFi, decentralized finance, cryptoassets, digital assets, metaverse, fintech
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