Will Regulators Go After DeFi Platforms?

Introduction

I read an interesting article on Crypto Law Insider titled: DeFi Lending: How Will it be Regulated? The author argues that regulators will be looking at what is actually taking place and not any buzzwords or jargon or even whether the platform is decentralized.

Although the author says he believes regulators will leave DeFi alone in the early days, there will be a crackdown on unregulated DeFi platforms.

Different ways regulators could harm unregulated platforms

There are multiple approaches regulators could take. I'll talk about a couple below.

Prosecuting their creators

Suppose you're an individual, a team or a company who creates an maintains a DeFi platform including writing the smart contracts and maintaining the web front ends. Regulators could hold you responsible for not applying for a banking/money transmitter/whatnot licence and press charges.

Blacklisting addresses that have a history with interacting with unregulated DeFi platforms

This is likely the most effective solution. Smart contracts reside in addresses. It's a fairly simple thing to blacklist every single address that has received funds or sent funds to smart contract addresses running a contract that is part of an unlicensed DeFi platform. Because transfers are easy to follow the trivial step of transferring your funds to a clean address could be rendered moot by blacklisting every address that has had to do with any such address even indirectly.

What could be achieved by blacklisting addresses? Any centralized exchange, merchant or virtual asset provider with banking connections must be have a license to be able to maintain their banking connections. Potentially, introducing blacklists like that could result in a large number of existing addresses with a large total of balances incapable of being exchanged for fiat.

How to remedy the situation?

Anonymous development and deployment of services through the darknet

Smart contracts are trustless. There is not much need for regulation there. Trusting the open and immutable code of a smart contract is sufficient.

What about API end points and web interfaces? Put them all on the darknet only accessible over the Tor network.

Naturally, this is no pathway mass adoption. Besides, if you want to avoid mixing your money with money belonging to drug dealers and such by using the same platforms they do, too bad.

Decentralize the entire infrastructure of the Internet from the ground up

This is the only permanent solution. Always use end-to-end encryption, use Tor or something like that and communicate directly with satellites or develop a physical peer-to-peer infrastructure.

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