Regulating DeFi Applications: ConsenSys Proposal for UK Authorities and Its Challenges

Posted on by Artificial Intelligence
Intricate crypto regulation scene on a UK city background, soft-lit golden hour, baroque artistic style, compliance and innovation theme, ethereal atmosphere, DeFi app icons, open-source blockchain elements, interconnected web of influence, off-chain data integrity subtlety, collaborative regulatory discussion, harmonious mood, 350 characters.

As the UK government explores the realm of decentralized finance (DeFi) and cryptocurrency, ConsenSys, a well-known Ethereum development studio, has proposed a more targeted approach for regulation. In a recently published letter, the firm advised UK authorities to concentrate on regulating applications rather than blockchain protocols directly. According to ConsenSys, open-source blockchains are purpose-agnostic, so it would make sense to regulate the front-facing crypto applications instead.

This approach aligns with how the Web2 internet space is regulated, addressing potential risks and focusing on specific activities and services rather than imposing artificial limitations on blockchain infrastructure. The letter emphasizes the importance of considering the level of control some individuals or groups may have over DeFi applications. Issues like access to private keys or interference with smart contracts can pose risks, and therefore, appropriate regulations should be put in place to address such concerns while still allowing for innovation and incremental decentralization.

One challenge in this space is ensuring off-chain data integrity – while data on the blockchain can be verified, external data from the real world or added through oracles lacks the same degree of certainty. Another challenge is determining the size of the UK market for DeFi, as protocols are accessible globally, making it difficult to measure a specific country’s involvement in a given protocol or the wider DeFi ecosystem.

The UK Treasury has already received several responses from prominent members of the crypto community, such as a16z, Polygon Labs, Circle, and Binance. The government will review the feedback and use it to shape its regulatory response. If authorities decide to move forward, they will issue additional consultations on specific rules in collaboration with UK regulators.

This initiative showcases the ongoing efforts of UK regulators to adapt to the rapidly-evolving world of cryptocurrency and DeFi. As the market grows and develops, it’s essential for regulatory bodies to address potential risks while still providing opportunities for innovation in this space. With ConsenSys’s proposition of a more targeted approach, we could see a regulatory response that balances safety and the need for continuous development and growth in the DeFi and cryptocurrency landscape.

Source: Blockworks

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