Programmable regulations are crucial to the legal future of Defi

Opinion by: Raks Sondhi, Chief Operating Officer, FreedX

Using rules set for simple static financial systems to manage, boundless and programmable ecosystems presents fundamental challenges.

In the past year alone, the decentralized finance (DEFI) platform has over $60 billion in crypto assets. However, most jurisdictions still lack a clear definition of a decentralized autonomous organization (DAO). This confusion is slowing innovation and undermining the credibility of regulators.

Councillors still believe there is a centralized actor that can license, audit or subpoena. However, DAOs are intentionally decentralized, smart contracts operate autonomously, and Onchain assets can be moved without permission.

Although U.S. regulators have begun positioning agreements under existing securities laws, courts have worked hard to determine whether they can assume responsibility for autonomous software. Traditional regulatory tools are not designed to oversee real-time development. These challenges have led global regulators to try new approaches to crypto regulations.

Globally, the Crypto Assets Market (MICA) attempts to provide the EU with a unified regulatory framework, even limiting the use of Tether’s USDT (USDT) that does not meet its standards. In the United States, the SEC and the Commodity Futures Commission filed legal proceedings against DAO participants and the DEFI agreement. Some U.S. states, such as Wyoming, even passed laws to give Daws a corporate status.

However, these efforts seem very limited and rely heavily on retrospective execution, which leads to creepy effects, builders hesitate to move forward, capital is idle, and regulations are trapped in a cat-to-mouse chase that has no one or cannot solve the actual problem. They are slowly patching holes in highly dynamic and evolving spaces.

Through embedded compliance management software

How do we stop chasing? The answer lies in some kind of strategy – a code solution. Instead of trying to adapt decentralized technologies to traditional legal systems, we need a new policy infrastructure that is as combined and programmable as the technologies it needs to oversight. We have to build the compliance layer directly into the code and embed regulatory logic in the infrastructure of the Defi protocol.

Related: FCA-registered BCP launches GBP Stablecoin

Just as the financial instrument Onchain now consists of interoperable modules, a loan agreement should be able to insert specific scale blocks to meet its jurisdictional needs. The DAO Ministry of Finance should be able to self-report tax incidents when they occur. The StableCoin protocol should be able to enforce sanction lists through zero-knowledge proof or OnChain proof, etc.

Some projects are already developing components for privacy and chain-chain compliance. Other projects are building a licensing architecture to meet regulatory requirements. Even centralized communication is exploring chain compliance rails that can be applied to decentralized protocols.

Legal clarity is key to reaching full potential

From a market perspective, embedded compliance has the potential to be out of risk and attract new investors and users. Legal clarity that embeds policies directly into infrastructure will reduce law enforcement gaps and enhance consumer protection.

For developers, it can unleash the synthetic nature of regulatory regimes, allowing them to choose from jurisdiction templates from using UI components, such as UI components, to adapt their code base in real time to achieve evolving policies. No more guessing whether your DAO token is secure, no longer wondering if the protocol is bound by reporting requirements, and less relying on expensive legal interpretations.

Although policy-code sounds advantageous, programmable policies have their own risks. Like any other connected environment, code can be utilized. We must wonder what happens when the combined scale block is damaged, broken or out of date. Governance, security and upgrade are still crucial, but democratic oversight is the backbone of blockchain technology. Embedding regulations into code does not mean removing them from public accountability, as this will reduce trust and transparency, further driving the Web3 space from mainstream adoption.

We are at a crossroads, either reimagining the intersection between law or allowing the gap between regulation and permissionless innovation to widen. A path leads to inclusive, efficient, and transparent finances that are subject to rules that everyone can see and understand.

Other paths lead to grey markets, law enforcement chaos and capital flight.

Strategy must develop modularly and adapt to new structures, logics and ecosystems. The key to unlocking is to use software management software.

Opinion by: Raks Sondhi, Chief Operating Officer of Freedx.

This article is for general information purposes and is not intended to be considered legal or investment advice. The views, thoughts and opinions expressed here are the authors alone and do not necessarily reflect or represent Cointelegraph’s views and opinions.