The Double-Edged Sword of Regulation
Regulation plays a central role in financial ecosystems and helps control where the consumer’s money goes. In this way, regulation can easily define legality to the regulators within a financial system. The regulators do this to protect the consumer, but often the consumer wants access to finance that operates outside of the central governing system. Centralized systems help people who are well-established within that specific system, while people who do not fit the mold are left behind and at a disadvantage. DeFi in cryptocurrency aims to help anybody who holds crypto, not just the well-established. With DeFi on the rise, consumers are starting to ask if regulation will ever find a way into the realm. While some critics think regulation is inherently bad, it actually can help ideas reach mainstream.
One of the most critical arguments against DeFi is also one of its strengths: decentralization. Centralized protocols help with security, but ultimately have shortfalls when taking accessibility into consideration. Regulation will most likely see its way into DeFi, as long as the DeFi industry continues to grow. Either DeFi will die, which is unlikely, or it will become a big enough financial breakthrough in which governments will start to feel the need to regulate it. Regulation is not a bad thing, as long as the DeFi industry checks off boxes deemed necessary and legal. In this way, great ideas that operate outside of centralization can reach mass adoption.
Regulation and DeFi might never work together. However, if a regulation crackdown begins, the great projects that make DeFi a plausible atmosphere will find a way to navigate through hardships. New ideas will continue to pop up, which will further the argument for an option other than centralized finance to exist in the future. For this to happen though, financial crime risk will have to decrease over time. Regulators are becoming more aware of the popularity of certain decentralized projects, especially because $90 billion has poured into Ethereum-based DeFi protocols already.
The Strength of DeFi
One can draw parallels between DeFi within crypto and the mass adoption of cryptocurrency itself. Governments around the world are starting to regulate which cryptocurrencies are trustable inside their borders. China, for example, deemed that all crypto transactions were illegal due to consumer safety issues. Although harsh, any government could outlaw transactions if they feel that it is necessary. The same goes for DeFi unless governing figures see the DeFi atmosphere as it appears to consumers; an accessible means for financial options. Governments, as well as independent loan businesses, could offer options other than loans based on well-established credit, but they choose not to because it would entail slashing profits. Federal governments usually have more funding than independent businesses and should be able to offer more for their citizens. Independent loans usually offer loans at higher interest rates for those unable to claim federal loans, but those loans might not be as feasible to pay off. DeFi is able to offer countless incentives for people left out and, as noted previously in Higher MELDucation, helping to empower those who are specifically left out is one of MELD’s main goals!
Smart contracts execute simple actions and are one of the main reasons DeFi is functional. No single entity controls smart contracts, leading to a more decentralized environment. They are an “if”, “then” type contract: If the consumer initiates a certain action, then the smart contract will initiate a second action. Say you want a loan within DeFi, you must first commit an action (usually spending crypto) to gain the loan that the smart contract will then send you. Within Cardano, smart contracts are relatively new. Because of this newness, DeFi projects in particular are willing to jump on Cardano’s breakthrough peer-reviewed blockchain tech and start a name. Without smart contracts, no DeFi projects would be alive today.
MELD is a part of the DeFi industry and will continue to build ideas and protocols that directly help its audience. Once the MELD protocol is complete, a large network of financial options for consumers will be available. When these financial options launch, they will not simply drop a product and ditch their ideals because a major piece of MELD’s promise is to continue efforts for the people who believe in its goals. MELD itself is not immune to regulation but will continue to follow needed laws in order to continue operations. In general, cryptocurrency is not immune to regulation, but this has never stopped its fight to reach mainstream.
Compliance, MELD, and IAMX
MELD takes measures in making sure its protocol operates with compliance in regards to regulation. The MELD Foundation (the legal entity that controls fiat accounts used by the protocol) requires transparency on fiat reserves, audits on amounts held, and access to the total fiat amount. KYC/AML procedures are also installed, and must verify the user’s identification during deposit, withdrawal, reception, or payment of loan interests in fiat. The framework that outlines the obligations is described below:
- Foundations need to be licensed or authorized to hold fiat in their legal framework.
- Foundations need to perpetually prove reserves, that no fiat fund was lost out of thin air, and that they still have access to enough fiat to return to lenders when required.
- Foundations need to audit on a specified schedule all of the accounts.
- Foundations need to perform KYC and AML procedures to verify users upon depositing fiat, withdrawing fiat, receiving loans, and paying loan interest.
- Nothing in our fiat ecosystem should violate the laws of our legal jurisdiction.
IAMX provides an opportunity to bridge the gap between the crypto atmosphere and more liquid economic activities. They do this by offering users the ability to create a digital identity through Biometric Identity Gateway, operating off of storage on Cardano’s blockchain. Physical stands will be in place, users will simply need to approach the stand and follow the instructions listed on the terminal. MELD will then provide users with a wallet and access to blockchain technology. The partnership will act as a toolkit, one that establishes a form of identity through concrete formulation, to help reach the goal of RealFi!
Regulation in DeFi might come sometime in the future, but it should not be overly concerning. Just like the great bitcoin regulation event in China, the cryptocurrency industry has always recovered. The strengths of DeFi can outweigh the strengths of centralized finances as long as security is sturdy and ongoing. As long as the great leaders of DeFi culture find a way to push forward, regulation should not stop growth. MELD has ways to ensure its protocol and services are both compliant and decentralized, and even has an established partnership with IAMX to help bridge the gap in regards to RealFi. KYC issues could continue to appear in the crypto industry, but new connections/partnerships could offer ideas on how to navigate legality. With people across the world left behind due to a negligent banking system, DeFi will continue to adapt to its changing and growing financial environment - regulated or not.
The opinions shared within this article are those solely of the MELD Ambassador. Note that the content within should not be considered financial, legal, or tax advice. Neither the author nor MELD Labs PTE Ltd. are financial, legal or tax advisors. None of this content should be used to make any form of financial, tax, or legal decisions. Do your own research and consult professionals as needed for official policies, restrictions, and requirements in your jurisdiction.
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