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SEC Commissioner: DeFi needs legal clarity to compete with CeFi

  • Regulatory clarity is needed for DeFi to compete against the current centralized financial system.
  • DeFi has grown over the past year and is now worth over $38 billion.
  • DeFi’s promises of democratizing financial services are alluring.

Hester Peirce, a crypto-friendly Commissioner with the U.S. Securities and Exchange Commission (SEC) stated that regulatory clarity is needed to allow decentralized finance (DeFi) to compete with centralized finance (CeFi).

Giving a speech for the George Washington University Law School’s “Regulating the Digital Economy” conference, Peirce added that the DeFi sector needs to be given the “freedom to experiment” to “offer investors financial services.”

DeFi – an alternative to CeFi

In the speech, she highlighted several times the importance of doing what is “best for investors and markets.”

Peirce opines that decentralized finance provides a way for regulators to put in place guidelines that protect investors.

“Decentralized finance will provide a very good for our ability to regulate with an eye toward protecting the interests of investors and markets, not incumbents.”

The events of the past few weeks that echoed the anti-Wall Street sentiments have inspired many to call for an end to the legacy financial system. Decentralized finance would take the place of the traditional financial system.

Unlike the current financial system, DeFi uses smart contracts rather than intermediaries, to facilitate lending, trading, and investing in crypto assets.

The promise of DeFi

Peirce, who is known as “Crypto Mom” within the cryptocurrency landscape because of her soft spot for the industry, said that “DeFi’s promises of democratization, open access, transparency, predictability, and systemic resistance are alluring.”

She highlighted that the Federal Reserve of St. Louis recently published a paper on DeFi.

The primer outlined the risks – security vulnerability, false decentralization, and scaling challenges – associated with DeFi, but concluded that the sector’s innovation is promising.

According to a CipherTrace report, crypto crimes slowed down in 2020 but DeFi hacks were on the rise.

Regulators, as she sees it, should be mindful of the potential upsides and downsides and allow the DeFi sector to flourish and compete against the incumbent financial system.

Growing DeFi industry

DeFi was a hotbed in 2020. The market’s Total Volume Locked (TVL) reached $1 billion for the first time in February and according to DeFi Pulse, the TVL has grown to $38.52 billion a year later.

Regulatory clarity could be a key factor in strengthening the growing sector.

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