Decentralized finance (DeFi) promises cheaper, faster and more accessible financial services by replacing traditional regulated intermediaries with software protocols and smart contracts. But modern financial regulation needs these intermediaries, or at least versions of them; they serve as implementation aids, security checks, the practical chokepoints a system needs to function. DeFi governance must focus more on the control points where compliance duties could realistically be assigned, supervised and enforced, rather than the underlying computer code.
Steven L. Schwarcz and Jack Tiedemann propose a layered regulatory strategy comprising four complementary approaches to identify these control points, as they are dispersed across software developers, governance structures, parties that interface with investors and third-party service providers. Their strategy could help to preserve DeFi’s efficiency benefits while cost-effectively restoring regulatory protection and accountability.
