Steven L. Schwarcz (Duke University School of Law) and Jack Tiedemann (Duke Law School) have posted Regulating Compliance in a World of Decentralized Finance on SSRN. Here is the abstract:
Decentralized finance (DeFi) promises cheaper, faster and more accessible financial services by replacing traditional regulated intermediaries with software protocols and smart contracts. But removing those intermediaries also removes the practical chokepoints for implementing modern financial regulation: customer identification and screening, disclosure, recordkeeping, operational safeguards and incident reporting. This paper argues that the core compliance challenge in DeFi is therefore a governance problem: regulators should focus less on DeFi’s underlying computer code and more on the control points where compliance duties could realistically be assigned, supervised and enforced. Identifying those control points could be challenging, however, because DeFi responsibilities are dispersed across software developers, governance structures, parties that interface with investors and third-party service providers. To address that challenge, the paper proposes a layered regulatory strategy comprising four complementary approaches: identifying and regulating gateway intermediaries that facilitate access to DeFi services; prescribing the compliance obligations those intermediaries should assume; establishing targeted governance standards for smart contracts and the oracle and data inputs on which they depend; and applying shadow-banking-type safeguards to constrain spillover channels between DeFi and the traditional financial system. No single approach would be sufficient on its own; their combined effect would reconstruct, at workable control points, the most critical accountability and oversight functions that DeFi displaces. Properly designed and implemented, this strategy could help to preserve DeFi’s efficiency benefits while cost-effectively restoring regulatory protection and accountability.
Highly Recommended!
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