Donna Redel is the former chairman of COMEX, a board member of New York Angels and an Adjunct Professor of Law at Fordham Law School. Olta Andoni is an Adjunct Professor at Chicago-Kent College of Law and Of Counsel at Zlatkin Wong, LLP.
A corner of the crypto universe representing less than 1% of total market capitalization of crypto assets has been grabbing the headlines since June. This is the world of decentralized finance, or DeFi, which alternatively is referred to as the center of innovation, an experiment or the new wild, wild west where projects move fast and break things.
A recent glance of articles on CoinDesk demonstrates the phenomenon. Once again, crypto headlines are focusing on the “craze,” the “frenzy of yield farming,” “investors pouring money into” and “another protocol going up in a fireball.”
Will the nonstop headlines and framing around the “hot” new DeFi protocols chill the institutional adoption that is beginning in earnest for crypto, digital assets and blockchain technology?
We believe that, at a minimum, the industry needs self-regulation. Without it, it is on a trajectory to serious regulatory scrutiny and reputational risk.
We are not the only ones to express concern about DeFi. Vitalik Buterin tweeted Aug. 14:
Also, Robert Leshner, the founder of Compound, a leading DeFi project, said of the yield farming craze recently:
As with almost everything in crypto, the strong sentiments and opinions make it difficult to determine the true essence and reality around the majority of DeFi projects. For us, this refrain is reminiscent of 2017’s frothy initial coin offering (ICO) days that ended badly for the good names of blockchain and crypto.
There are certainly similarities: trading frenzy; projects emerging with little or no testing and without audit; no clear regulatory guidance and the recycling of now leading to inflated gas prices. Are we on the precipice of one of the regulatory agencies waking up and sending a missive similar to ?
On the legal front, there is a lack of clear consensus about which agency should be regulating. And, again, there is a lack of guidance from multiple agencies that could be responsible for DeFi projects or for the space generally.
We are alarmed and concerned with the apparent lack of 360-degree understanding of the potential role of the various actors or operators and their possible interactions with the projects, the governance and hence DeFi ecosystem. Tokens are appearing overnight. Projects are hesitant to use, or totally avoid, terminology that might infer “issue,” “issuance” or “issuer,” as these are hypersensitive words in the securities world.