The next frontier in financial reform is Decentralised Finance (DeFi). Numerous flaws and antiquated practices in the current financial sector can be fixed with the use of cutting-edge blockchain technology. It is understandable why there is such a surge in interest in DeFi, and DeFi projects are under pressure to live up to their promise. Blockchain-based smart contracts, the same technology that underpins Ethereum and the Dusk Network, enable DeFi. Smart contracts are an innovative kind of finance that eliminates the requirement for financial intermediaries like brokers and clearing institutions by expressing financial transactions in programming code. All transactions are done directly between participants in this manner. That’s why some people hesitate to buy Bitcoin but others want them to access DeFi and choose to use wrapped Bitcoins like WBTC.
Applications for DeFi enable novel approaches to asset creation and transfer. Adoption is required if these techniques are to upend the global banking sector. No matter how dispersed and various these apps are across worldwide marketplaces, adoption necessitates conformity to the current laws and standards. rDeFi (regulated Decentralised Finances) makes this happen.
Along with scams and hackers, financing illicit activity and unlawful transactions also pose a threat to DeFi’s security. Similarly, many claims that DeFi techniques are employed in the money-laundering process. Only 35000 transactions were made every day on Ethereum in 2015. Nevertheless, by the close of 2021, there were 1,300,000 daily transactions. Additionally, according to experts, the DeFi market cap could expand by a factor of ten during the next five years. While there are many ways that DeFi expansion benefits society, it is also reasonable to predict that there will be an increase in scams, hacking, suspicious transactions, and money laundering operations.
Benefits of rDeFi
Scams, hackers, and other unlawful activities are causing everyone a lot of trouble right now. Anyone knowledgeable with cryptocurrency trading and DeFi protocols has encountered con artists at least once, if not frequently. The DeFi is not threatened by following due diligence, know-your-customer, or anti-money laundering requirements. The regulation is anticipated to be implemented “step by step.” However, developers, dApps, and contributors must collaborate for the restrictions to benefit the DeFi environment.
If embraced by regulated financial markets, the currently available decentralized finance applications stand to gain greatly. The money is in these regulated marketplaces. Increased liquidity makes markets more dependable and fairer. The only way to get the public to adopt your idea is to stay within the confines of the current regulatory framework.
By this, we mean institutional and retail customers of tokenized assets and investors in stated assets.
Tokenized assets can be everything from stocks or bonds to digital assets. If it is represented in a tokenized form. Because rDeFi products adhere to existing regulations, its adoption potential is far more obvious and far-reaching than its crypto-minded predecessor, DeFi.
Implications towards rDeFi
Globally, countries are currently implementing a variety of regulatory measures to regulate crypto-assets, ranging from complete regulatory absence to outright banning crypto-asset transactions. A strong global regulatory framework is urgently needed to prevent financial crimes like money laundering and the financing of terrorism, as well as threats to investors worldwide because of the global character of crypto-asset transactions and, specifically, DeFi transactions. The establishment of a global regulatory framework to address the money laundering and economic stability threats linked with DeFi has made relatively little progress to date. Through the Financial Actions Task Force, the international body that monitors money laundering and terrorism funding, the Financial Actions Task Force has primarily focused on regulating AML/KYC for centralized organizations like cryptocurrency exchanges and wallet providers.
However, if DeFi protocols are sufficiently decentralised, KYC requirements cannot be simply added because doing so would require consent from a dispersed community of governance token holders who are spread throughout the world and may not be eager for this to happen.
Collaboration between software developers, the investment community (such as owners of DeFi governance tokens), regulators, and industry experts would also be necessary given the peculiarity of the technology. To certify protocols and codes as compliant, regulators would also need to learn how to develop software. To create a strong framework for regulating DeFi, all these aspects must be considered.