Rise of Decentralised Finance | Reimagining Financial Regulation

Based on decentralised ledger technology (DLT), decentralised finance (DeFi) involves the provision of financial services without reliance on centralised intermediaries (such as banks). While DeFi seeks to complement existing financial services, its reliance on crypto asset speculation and arbitrage coupled with instances of security, operational and governance failures, may pose risks to consumers and the financial system. Therefore, the proliferation of such markets without any regulatory oversight requires immediate consideration. While existing literature focuses on the innovation potential of DeFi, there is little discussion about the legal implications of DeFi. This article seeks to address this gap in the literature and recommends possible regulatory approaches. The article highlights that DeFi will challenge traditional financial regulations designed for centralised systems where identifying the subject of regulatory obligations is straightforward. Further, participants in a DeFi system can be spread across multiple jurisdictions, challenging the determination of the relevant jurisdiction whose law will apply. As the DeFi market is still evolving, this article argues that regulatory focus must be on specific aspects. This includes regulatory clarity for cryptoassets, regulating gatekeepers of the DeFi ecosystem i.e., service providers (like exchanges, wallets, custodians), and issuance of regulatory guidance on the applicability of existing laws to DLT systems. These regulatory approaches must be supplemented with measures such as designing internationally well-recognised standards for DeFi services, harnessing technology (“Regtech” and “Suptech”) for better supervision and compliance and leveraging existing regulatory sandboxes for a cost-benefit analysis of such innovations and determining regulatory responses.

About the Author

Shehnaz Ahmed

Shehnaz is Senior Resident Fellow and Lead, Fintech and ALTR. She works on emerging areas of policy and law on the intersection of finance, technology, and inclusion. At Vidhi, she has worked with several Ministries of the Government of India on matters relating to digital payments, financial regulation, commercial laws and business and human rights. Her independent research at Vidhi focuses on leveraging technological solutions to build a robust and inclusive financial system for all in India. Prior to joining Vidhi, she worked as an associate at the Financial Regulatory Practice at Cyril Amarchand Mangaldas, Mumbai where her work focused on advising leading financial institutions (both Indian and multinational), including payment systems on legal and regulatory issues in India. She has also involved in several mergers and acquisitions in the financial space. She has also worked as an associate at the Dispute Resolution team at JSA, New Delhi. She writes frequently for the Oxford Business Law Blog and media outlets such as Hindu BusinessLine,Financial Express, MoneyControl, FirstPost, etc. She graduated from RML National Law University in 2011.