Regulation Is Coming for DeFi and Crypto — Here’s What to Know

by Jake Wengroff

Cryptocurrencies reached a record capitalization of $2 trillion in April, as more investors stocked their portfolios with digital tokens. However, oversight of the market remains patchy.

SEC Chairman Gary Gensler said the crypto market involves tokens, which are used by investors as securities. If they are securities, they are unregistered, and could leave prices open to manipulation and millions of investors vulnerable to risks.

“This asset class is rife with fraud, scams and abuse in certain applications,” Gensler told a global conference, and as reported in Reuters. “We need additional congressional authorities to prevent transactions, products and platforms from falling between regulatory cracks.”

He also called on lawmakers to give the SEC more power to oversee crypto lending and platforms like peer-to-peer decentralized finance, or DeFi — sites that allow lenders and borrowers to transact in cryptocurrencies without the intervention of traditional banks.

However, the industry is far from an unregulated “Wild West.” Kristin Smith, who runs the Washington-based Blockchain Association, said that the crypto industry is eager to help find “workable solutions” to the SEC’s concerns, as several crypto exchanges, platforms and services comply with oversight by state authorities and other federal regulatory bodies.

Top Areas of Regulatory Concern

Regulators have an eye on crypto assets and related services in the following areas:

Investor Protection

Protections are in place for customers of financial institutions that become insolvent and for victims of fraud. Such protections need to be implemented for investors of cryptocurrencies and other crypto assets as well, in order to build greater trust and wider acceptance in the market.

Compliance With Rules to Combat Money Laundering, Drug and Human Trafficking and Terrorist Financing

Perhaps a universally accepted reason for regulation, such activities need to be policed and thwarted globally in the most aggressive way possible.

Access to Banking and Payment Infrastructure

Currencies, financial instruments, and other assets are used in banking and lending decisions, as well as to support a global payment infrastructure. New financial instruments and assets classes can join their traditional counterparts and participate in the system with rules and oversight.

Tax Evasion

Governments need taxes to provide services for their citizens. If income and capital gains taxes are imposed on traditional asset classes and properties, regulators can consider whether such taxes should extend to crypto assets as well.

Mainstream Moves

One of the largest Bitcoin and digital currency wallets and exchanges, Coinbase, went public in April, as a “watershed” moment for cryptocurrencies in their move toward mainstream acceptance. As a public company, Coinbase will be subject to reporting and capital holdings rules, lending a layer of legitimacy to the cryptocurrency industry.

“While it could help crypto companies handle emerging U.S. regulatory frameworks,” cautions The Armchair Trader, “this trend also raises questions over whether cryptocurrency institutionalization will undermine the ideology of DeFi.”

However, it is generally believed that regulation is inevitable, and would legitimize the technology for broader use, such as in lending and tokenization of assets. With broader acceptance, it’s not only initial crypto investor naysayers who would climb on board, but smaller, risk-averse institutions like regional banks, credit unions, and auto lenders, who would be attracted to the asset class because of newfound credibility, therefore driving the industry’s growth.

A Title Registry as a Way to Prove Ownership

As decentralized finance and blockchain technologies proliferate through traditional banking and finance sectors, owners and service providers can benefit from a third-party record of ownership. 

Market-based solutions are needed to address market-based problems. As governments scramble to understand the constantly evolving crypto market, regulators might not be the most equipped to develop solutions that support the needs of investors and others.  While laws protecting against fraud or compromise are needed, solutions developed by active, experienced participants can serve the market alongside developing regulation. 

TransitNet is creating the industry’s first offchain title registry of record for digital wallets and other platforms. More than an additional layer of protection for crypto assets, the title registry also provides proof of ownership, no matter what the transaction. 

Join the forefront of the new crypto infrastructure.

Request an invitation to join the title registry today!

Jake Wengroff writes about technology and financial services. A former technology reporter for CBS Radio, Jake covers such topics as security, mobility, e-commerce, and IoT.


Reuters – U.S. SEC Chair Gensler calls on Congress to help rein in crypto ‘Wild West’

The Armchair Trader – Would more regulation be good or bad for DeFi and crypto land?