The Malta Independent 14 April 2024, Sunday
View E-Paper

Sergei Kondratenko: trends in the regulation of decentralized finance

Thursday, 15 February 2024, 09:47 Last update: about 3 months ago

In recent years, there has been a significant leap in the development of the global financial world - the emergence of decentralized finance (DeFi). Fintech expert Sergei Kondratenko says that this financial model differs from traditional ones (TradFi) in the absence of intermediaries and centralized processes.

DeFi tools are used to carry out asset management, lending, and insurance operations. However, unlike TradFi, DeFi transactions become automated thanks to smart contracts based on distributed ledger technology (DLT). This ensures transactions are executed without intermediaries, and users have direct control over their assets. But besides the positive aspects, the democratic functionality of DeFi opens a direct path for the activities of financial fraudsters. Hackers often break into decentralized finance networks, and terrorist groups use digital assets to finance their criminal intentions.

Global financial regulators are showing increased interest in the development of DeFi. They strive to set the standard for this dynamic sector. However, in the absence of central governing bodies and all operations being carried out through smart contracts, the question arises of how to effectively regulate such a market.

Sergei Kondratenko is a recognized specialist in a wide range of e-commerce services with experience for many years. Now, Sergei is the owner and leader of a group of companies engaged not only in different segments of e-commerce, but also successfully operating in different jurisdictions, represented on all continents of the world. The main goal is to drive new traffic, create and deliver an online experience that will endear users to the brand, and turn visitors into customers while maximizing overall profitability of the online business.

Sergei Kondratenko: FATF recommends effective DeFi management measures to regulators

The Financial Action Task Force (FATF) is an international organization of 37 member countries. Five years ago, the FATF released a guide with a methodology for regulating cryptocurrencies, which is regularly updated. The latest version includes recommendations regarding DeFi and NFT regulation for the first time. According to Sergei Kondratenko, the document states that DeFi protocols are almost impossible to fully regulate. DeFi projects are often not crypto platforms, and their developers do not necessarily comply with FATF standards. However, according to FATF representatives, DeFi projects are often presented as completely decentralized, those that do not have a single governing body. But in fact, a certain group of people retains control over them.

- FATF recommends that national regulators actively identify such individuals and hold them accountable. This direction emphasizes the importance of carefully analyzing the structure of DeFi projects and identifying the actual organizers within these systems.- Sergei Kondratenko comments on the FATF position.

The specialist says that otherwise, the FATF transfers a wide range of tools for managing the DeFi sector to government regulators. These may include the development and implementation of laws and regulations that aim to set standards for security and transparency in DeFi. Regulators may also consider collaborating with the DeFi community itself to develop self-regulatory mechanisms.

Overall, the FATF's approach to regulating DeFi highlights the need for a balance between supporting innovation and ensuring financial security.

Strategies of regulators regarding DeFi – Sergei Kondratenko

Securities and Exchange Commission (SEC) also monitors activity in the DeFi space. It recognizes their similarities to traditional banking activities such as lending, lending, and insurance. The head of the regulator, Gensler, emphasized that in the context of protecting the interests of investors, trading and credit DeFi protocols require special attention. Sergei Kondratenko supported the opinion on the need for multilateral regulation of the cryptocurrency industry, where attention will be focused specifically on DeFi.

Gensler, in turn, expressed confidence that the SEC should be given the authority to oversee the DeFi sector. He believes this is the simplest way to ensure effective oversight.

SEC Commissioner Hester Pierce emphasized that operations with DeFi protocols fall under the jurisdiction of the SEC if they manage assets or perform the function of securities. Pearce urged creators of decentralized exchanges (DEXs) and automated market makers (AMMs) to consider the possible consequences, especially in the context of securities trading.

Sergei Kondratenko considers it important to note that the SEC is already taking steps to regulate DeFi projects. The commission imposed fines on the developers of the DeFi lending platform DMG and the issuers of mTokens tokens, which raised $30 million.

(US) Financial Crimes Enforcement Agency (FinCEN) is responsible for compliance with banking legislation and AML/KYC standards, as well as combating financial fraud. Sergei Kondratenko believes that DeFi can be subordinated to FinCEN as the regulator of money transfers. Despite FinCEN's lack of expressed interest in the DeFi sector at this time, Dilendorf's attorneys argue that most decentralized exchanges (DEXs) and DeFi protocols could fall under the regulator's authority.

More than 3 years ago, the European Commission also introduced Markets in Crypto Assets (MiCA) rules to strengthen consumer and investor protection in this area. The MiCA regulations do not directly cover DeFi, but require digital asset issuers to register as legal entities to provide crypto services in the European Union. According to Sergei Kondratenko, issues related to the definition of an issuer in the DeFi context present some complexity. The fact is that the process of integrating MiCA standards into the legislation of the European Union countries has been going on for four years and is not yet completed.

(Germany) The Federal Financial Supervisory Authority (BaFin) has taken advanced measures in regulating DeFi. The decentralized exchange of tokenized assets Swarm Markets has received a license from the department. According to Kondratenko, the platform uses an AML(Anti-money laundering) /KYC (Know Your Client) verification mechanism to obtain approval. It allows users to confirm their identity without revealing it. This approach demonstrates BaFin’s commitment to developing more detailed measures to regulate the DeFi sector.

Position

The attitude towards regulation in the DeFi sector raises different points of view in the crypto community. Sergei Kondratenko emphasizes that despite differences in opinions, the majority recognizes the inevitability of regulatory intervention. Authorities seek to maintain market controls to prevent unacceptable practices and protect the interests of investors.

- For decentralization supporters, the possible regulation of DeFi raises certain concerns. However, they argue that full regulation may be difficult or even impossible. It is assumed that laws will be observed formally. Users who value decentralization and privacy will find ways to circumvent these boundaries, notes Sergei Kondratenko.

The expert confirms the majority opinion that the regulation of DeFi is inherently a complex task, given its nature and desire for decentralization. It's like the fight against online piracy, where restrictions exist, but many still find ways to circumvent the restrictions. Ultimately, Kondratenko believes that the future of DeFi will remain influenced by constant interaction with regulators and the gradual improvement of this dynamic sector.


Brought to you by Gerald Crowdford - BuyMedias
  • don't miss