Crypto regulation: Balancing the paradox when DeFi meets structures of authority

Crypto regulation is almost oxymoronic. The values that underpin Web3 and DeFi tech, and the basis of its popularity, include freedom from a governing body, self-ownership of digital resources and data, the secure movement of assets without the need for institutional intervention.

The horizontal spread of authority characteristic to Web3 ultimately poses a threat to the traditional top-down measures of power that govern the physical world. As national and international governments attempt to navigate the grey areas of the crypto world through new rules and regulations, we see a paradox begin to present itself.

How can a balance be found between structures of traditional authority and the values of Web3, without undermining the essence of decentralisation?

Joni Pirovich is the Principal lawyer of Blockchain and Digital Assets Services and Law and specialises in laws governing decentralised autonomous organisations (DAOs).

“The law doesn’t deal well with decentralisation that spans across multiple countries, nor evolving models of governance,” Pirovich said. “Each country wants to maintain its sovereign right to govern, issue financial services licences and levy taxes but I think this technology [blockchain] will necessitate a departure from this paradigm of thinking.”

And this new paradigm of thinking is beginning to show. A report by Deloitte examined the risks associated with decentralisation and made findings that “63 per cent of business leaders predict a shift towards a more decentralised business model. Responsibility for business decision making will move from centralised management to divisional leaders.

Priovich said there is a place for an international body such as the OECD [Organisation for Economic Co-operation and Development] to set some minimum standards for DAOs as well as for the industry to be more proactive with industry standards and codes of conduct.

“A DAO may launch with an initial model of governance but we are already seeing that as a DAO’s community grows so too do the number of voices suggesting modifications to governance to better fulfil the DAO’s aims. Legal recognition of a DAO is required to give it the capacity to enter into contracts, hold property and offer limited liability. However in my view the legal recognition needs to ensure DAOs have flexibility to breathe, grow and learn but with a sunset date so the effectiveness of the law in promoting safe innovation with DAOs can be reviewed,” she said.

How governments are responding

Governments are starting to take serious notice of the direction DeFi seems to be heading in and have had ramp up the development of their responses so as to not fall behind the rest of the world. Within the last months, both the United States and Australia have started setting out formal regulatory frameworks for navigating the growth of the crypto space, both positioning themselves as cautious supporters of the tech.

Part of this process involves the creation of ‘crypto-friendly’ regulations; laws that support and protect those who are involved with DeFi technology rather than laws that seek to control it.

Dr Jane Thomason, an entrepreneurial social Blockchain leader, said that partnerships need to take place between governing bodies and blockchain developers to ensure the right needs are being met when introducing new regulations.

“Regulators need to work closely with technologists to continue to understand the evolving landscape of Blockchain and stay abreast of the developments international standards organisations are making in this regard,” Thomason said.

“Otherwise, regulators may employ a ‘buy time’ strategy until terminology unifies and stabilises or use “activities-based regulation”, whereby the focus is on the underlying activity that is conducted, such as processing stock trades, rather than on the technology used to conduct the activity to promote a sustainable regulatory environment.

“This approach would counsel treating blockchain technology no differently from other technologies, and essentially fitting it into existing regulations about financial practices,” said Dr Thomason.

To sustainably balance the paradoxical nature of the tech and regulations, authoritative bodies and blockchain developers need to work in tandem with one another to avoid what could end as a colossal undermining event. As governments across the world continue to enact new legislation that reflect their attitudes towards crypto technologies, be that for or against, this is an area that will require constant vigilance to ensure the values of both parties are upheld.

Elements of the interview are minted as a part of an NFT by Joni Pirovich available here.