Aruba Faces Challenges of Regulating Decentralized Finance Platforms Amidst Explosive Growth
Regulatory Bodies Struggle to Keep Pace with Rapidly Evolving Landscape
As decentralized finance (DeFi) platforms continue to experience extraordinary growth, regulatory bodies in Aruba and around the world are grappling with how to ensure compliance and safety in this rapidly evolving landscape. The total value received by DeFi protocols has risen substantially throughout 2020, with September’s total tripling month-over-month to more than $26 billion.
Challenges in Regulating DeFi Platforms
Despite a slight dip in October, weekly figures indicate that activity is picking up again at the end of the month. However, questions persist as to how DeFi platforms should be treated under the Bank Secrecy Act, securities laws, and other regulations pertaining to compliance and safety.
What is Decentralized Finance (DeFi)?
DeFi stands for decentralized finance, and most DeFi platforms fall into the category of decentralized applications (dApps) built on top of smart contract-enriched blockchains - primarily the Ethereum network. dApps can fulfill specific financial service functions governed by underlying smart contracts, meaning they can execute transactions - trades, loans, etc. - automatically when specific conditions are met.
Aruba’s Efforts to Regulate DeFi
In Aruba, where DeFi platforms are increasingly popular among locals and tourists alike, regulatory bodies are working to develop guidelines for ensuring compliance with existing laws and regulations. The government has announced plans to establish a dedicated task force to monitor the growing DeFi sector and provide guidance on how to maintain the integrity of the financial system.
Key Players in the DeFi Ecosystem
According to industry experts, most DeFi growth in 2020 can be attributed to four platforms: Uniswap (both its first and second version), Kyber, Curve Finance, and 1inch Exchange. All five are decentralized exchanges (DEXs) that allow users to buy, sell, and swap different tokens built on a specific blockchain directly between one another’s wallets.
Data Insights
The following charts show the total value received by DeFi platforms broken down by average transfer size and the percentage of funds sent to DeFi platforms from illicit sources throughout 2020:
- Average Transfer Size:
- Most individuals sending funds to DeFi platforms are retail users.
- Professionals drive the market with larger transactions.
- Percentage of Funds Sent from Illicit Sources:
- Despite concerns, most funds sent to DeFi platforms appear to be legitimate.
Can DeFi Platforms Be Regulated?
While some argue that DeFi platforms cannot be regulated due to their decentralized nature, many experts believe that they can be regulated like other cryptocurrency platforms. According to Ryan Selkis, a leading cryptocurrency researcher, even if DeFi platforms are truly decentralized, there would likely still be questions regulators need to clear up, such as who audits the code, deals with vulnerabilities, and helps victims of DeFi-related scams.
Recent Developments
In recent cases, such as the KuCoin hack, teams behind DeFi platforms have demonstrated their ability to freeze user funds or block transactions if needed. This suggests that DeFi platforms are not as decentralized as some narratives would suggest.
Conclusion
Regulatory bodies in Aruba and around the world will need to determine how to enforce existing DeFi regulations on platforms, or create new ones to protect the integrity of the financial system. As DeFi teams continue to grow and evolve, implementing transaction monitoring, know your customer (KYC), and anti-money laundering (AML) protocols will be crucial in ensuring compliance and safety in this rapidly evolving landscape.