Opinion by: Heidi Nawazan, Chief Compliance Officer in 1 inch
The web3 requires a clear regulatory system that addresses the innovation and user safety of innovation in decentralized finance (Defi). A size-fit-all approach cannot be obtained to regulate the defi. The industry requires custom, risk-based approaches that balance innovation, safety and compliance.
Defense challenges and rules
A common criticism is that the regulator leads to the death of the investigation innovation, tracing the Biden administration back. In 2022, uncertainty for crypto businesses increased after cases against coinbase, Benance and Openia for alleged violations of securities laws.
Under the US administration, the Securities and Exchange Commission agreed to dismiss the case against the coinbase, as the agency reversed the crypto trend, indicating on a route towards regulation with clear borders.
Many will argue that the same risk is the same rule. Applying traditional finance requirements on DEFI will just work not by many aspects but with the most technical challenges.
Openness, transparency, irreversibility and automation are the major parameters of DEFI. Without clear rules, however, the prevailing issue of “schemes like Ponzi” may focus on cases of effective innovation use to add “misleading perception” of blockchain technology.
Guidance and clarity from regulatory bodies may reduce significant risks for retail users.
Policy makers should take time to understand the architecture of Defee before starting restrictive measures. DEFI requires risk-based regulatory models that understand its architecture and address illegal activity and consumer protection.
Self-controllers cultivate transparency and security in defi
The entire industry recommends implementation of highly self-regulatory structure which ensures continuous innovation, ensuring consumer safety and financial transparency.
Take the example of DEFI platforms, which have taken a self-control approach by implementing strong security measures, including transactions monitoring, wallet screening, and applying a blacklist mechanism that restrictions a wallet of doubt with illegal activity.
Sound safety measures will help DEFI projects monitor onchain activity and prevent the misuse of the system. Self-regulation may help DEFI projects to work with more validity, yet this may not be the only solution.
Clear structure and governance are important
It is no secret that institutional players are waiting for the regulatory green lights. Adding to the list of regulatory structures, markets in Crypto-asset (MICA) set stones for future Defi rules that can lead to the institutional adoption of Defi. It provides business with a framework for regulator clarity and operating.
Several crypto projects will conflict and die as a result of high compliance costs associated with Mica, which will implement a more reliable ecosystem by requiring enrichment transparency from the issuance and will quickly attract institutional capital for innovation. Clear rules will make more investment in projects supporting investor trusts.
Oblives in Crypto are disappearing quickly. Blockchain analytics tools, regulators and companies can somewhat monitor suspected activity by preserving user privacy. The future adaptation to the future of MICA rules can enable compliance-focused defi solutions, such as obedient liquidity pools and blockchain-based identity verification.
Regulatory clarity may break obstacles for DEFI integration
The iron gate of banks has been another significant obstacle. Compliance officers often erect walls to keep banks out. Bank supervisors distant companies that are out of compliance, whether it is indirect investigation or penalty, banging doors on financial operations of crypto projects.
Clear rules will address the issue and for DEFI and banking integration, not to create a convenience to a inhibitor. In the future, traditional banks will integrate DEFI. Institutions will not replace banks, but merge Defi’s capabilities with the structure of tradefi.
recent: Hester Peerus called for a Second Rules to ‘bake’ in crypto regulation
In January 2025, the cancellation of Staff Accounting Bulletin (SAB) reduces accounting burden for banks to recognize the crypto assets organized for customers as both assets and liabilities on their balance sheet. Previous laws created obstacles of increased capital reserved requirements and other regulatory challenges.
The purpose of sab 122 is to provide a structured solution for active financial integration from reactive compliance – a step towards making defi and banking coordination. Crypto companies should still follow accounting principles and disclosure requirements to protect crypto assets.
Clear rules can increase the frequency of cases of banking usage, such as detention, reserve backing, asset tookation, stabelcoin and offering accounts to digital asset businesses.
Construction of bridges between regulators and innovators in DEFI
Experts who indicate concerns about over-regulations killing innovation of DEFI can now address him using “regulatory sandbox”. This dispensing startup with a “safe area” to test your products before committing to the full -scale regulatory mandate. For example, startups in the United Kingdom under the Financial Conduct Authority are ending using this “test and error” method that has intensified innovation.
Their businesses have been able to test innovation and professional models in a real -world setting under regulatory supervision. Sandboxes may be accessible to licensed institutions, irregular startups or companies outside the financial services sector.
Similarly, the DLT pilot regime of the European Union further enhances innovation and competition, by reducing the upfront compliance costs through “Gates”, encouraging the market entry for startups that align the legal structure at each level, upgrading technological innovations.
Clear rules can cultivate and support innovation through open dialogues between regulators and innovators.
Rai by: Heidi Nawazan, Chief Compliance Officer in 1 inch.
This article is for general information purposes and is not intention and should not be taken as legal or investment advice. The ideas, ideas and opinions expressed here are alone of the author and not necessarily reflected or represented the ideas and ideas of the components.
