Decentralized finance (DeFi) protocols will survive government and corporate efforts to impose traditional financial regulations designed to create a walled garden of permissioned digital systems, according to Will Reeves, CEO and co-founder of Bitcoin (BTC) rewards company Fold.
Reeves told Cointelegraph that regulatory proposals requiring DeFi protocols to embed biometric identity checks within smart contracts, or other similar traditional financial (TradFi) regulations, will backfire, as did efforts to control the spread of information on the internet.
Policy proposals to implement identity checks into digital asset systems in the White House’s Strengthening American Leadership in Digital Financial Technology report. Source: The White House
He also warned that governments and legacy financial institutions will use TradFi incentives to drive people to permissioned custody through traditional investment vehicles like exchange-traded funds (ETFs), which have benefits over holding crypto directly, including use as collateral for loans. He added:
“This is simply a chapter that will lead to an inevitable victory for these open networks. Over time, they will win, but along the way, you’re going to see regulations and things meant to delay progress.”
Entrenched financial institutions are pushing regulations to slow down innovation while they position themselves to enter the crypto sector over the next decade, Reeves told Cointelegraph.
Despite this pressure, protecting open-source software developers from legal liability remains the biggest priority to protecting permissionless financial protocols from centralization and regulatory overreach, he said.
Related: US Treasury’s DeFi ID plan is ‘like putting cameras in every living room’
Financial Institutions and governments enter the crypto world
As legacy financial institutions continue to increase their presence in crypto and demand tighter government regulation over the sector, privacy and financial sovereignty advocates worry the increased scrutiny could undermine the core principles of crypto and DeFi.
DeFi protocols promise to democratize finance and bank the unbanked, allowing anyone in the world with a cellphone and an internet connection to shift value and risk through an open, global financial system.
Forcing government-issued credential checks or imposing other know-your-customer (KYC) requirements onto DeFi protocols undermines permissionless access, decentralization, and increases financial surveillance risks, critics say.
These risks would also make crypto and DeFi indistinguishable from the legacy financial system they were meant to replace, critics of these policies argue.
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