DeFi takes on traditional finance; the regulatory challenges
Synthetix, one of the largest decentralised digital asset derivatives exchange recently received mainstream media attention for driving the growth of a $US10 billion ($14.2 billion) the decentralised finance industry, commonly referred to as DeFi.
Kain Warwick, Sydney-based Founder of Synthetix, said recently to the AFR that over $US600 million of circulating money has been injected into the Synthetix platform in the last four months for users to trade synthetic digital assets and lend their digital assets to each other through automated protocols.
DeFi platforms such as Synthetix, Compound and Uniswap aim to remove centralisation in traditional financial services and move to a more decentralised and automated platform governed by the protocol and the code are open source and accessible to the public for transparency. Or, in Kain's words:
We developed [Synthetix] and made everything open source, so anyone could use our code and build on it...
The risks of open source DeFi platforms is that the code can be copied and platforms can be replicated in a matter of minutes.
Recently over $US14 million of funds was removed from a decentralised platform called SushiSwap, shortly after the project was launched. Within days of launching, SushiSwap saw over $300 million to $1.6 billion deposited onto its platform. The platform was a fork of the open source code of Uniswap. The anonymous founder called "Chef Nomi" has since returned the funds to the platform however, some projects are not so lucky. YAM Finance saw more than $20 million withdrawn by founders prior to the platform being crippled by a bug that crashed its token price and the DeFi market instantly.
In addition, the potential for high interest rates and "easy" profits of many DeFi projects is likely to catch the attention of the financial services regulator ASIC in Australia who have been monitoring unlicensed offerings of financial products and scams using AI.
Though ASIC has published guidance in relation to the regulation of digital currencies and ICOs generally, it remains to be seen how the regulators will address individual DeFi projects where the underlying entity (where one exists) does not have day-to-day "control" of the mechanisms that govern the platform.
Given the comparisons drawn between DeFi with the ICO boom in 2017, it is likely that we will see more regulatory scrutiny against DeFi projects in Australia and internationally.
Jessica Sier of the AFR asserted that:
While some ICOs worked earnestly to develop new ways of using smart contracts and the blockchain, the vast majority took advantage of the exuberant and greedy market, committing widespread fraud and often outright theft.
We aren't sure of any published basis for these remarks, but there has been a prevailing skeptical view of the large sums of money which flooded ICOs historically and the issues around transparency which followed.
Nevertheless, with the increase in venture capitalist involvement in decentralised finance projects and the continued growth of DeFi projects, the increase in funds being locked up in decentralised platforms will likely see regulators continue to take a keen interest in addressing the regulatory issues which will inevitably arise.