With the rise of many projects and initiatives, blockchain technology’s potential applications have proven truly limitless. The most well-known application of blockchain technology is decentralized finance, or DeFi.

DeFi was founded in 2005, although the sector has seen significant growth over the past few years. More investors are now interested and taking advantage the multitude of opportunities available.

Unfortunately, regulators are now paying greater attention to emerging finance markets, despite the increased interest from investors and developers. What does regulation look like for DeFi?

Lennix Lei, OKEx director, shares his views on regulation and the Defi Economy in an exclusive interview. But just before we get into that, you may want to also take a look at Lai’s opinion on the future outlook of cryptocurrency’s regulatory landscape here.

OKEx, a decentralized exchange (DEX), offers a range of custom solutions to traders from all levels.

OKEx DEX, a platform that is located in Seychelles offers a range of trading tools, such as liquidity pooling and cloud services. It also yields farming and exchanging.

Lai says that DeFi is now at a stage in which it can be considered one of the best, if no, most established applications on blockchain technology.

“The second phase in the applicability of blockchain technology is DeFi, which in itself is a very big concept that we are barely starting from a boring landing.

Now, we can’t say, we have zero use cases in blockchain anymore. Because we got DeFi, and that’s proven because the total value locked (TVL) in DeFi protocols right now has surpassed the 200 billion mark. So it’s getting higher and higher. It’s already proven, and loved by global users,”
Lai noted.

Despite all the investment, DeFi has been faced with a challenging regulatory battle. This makes its future uncertain.

OKEx is a prominent project that has graced DeFi in recent years and is therefore not exempt from any potential effects of current regulatory efforts of various governments worldwide.

Although some countries are open to the idea of a crypto-based economy, they are not yet fully regulated. Other countries, however, have placed bans on corporate activities related to cryptocurrency and the DeFi economy as a whole.

Is there a way to make DeFi more effective?

The majority of exchanges that allow crypto transactions had been partially centralized before DeFi arrived. That led to criticism from many who claimed that crypto assets’ end-to-end processing was not as distributed as it seems.

The arrival of DeFi (and decentralized exchanges, DEXs), changed this narrative. Most exchanges use a decentralized method for the execution of crypto transactions.

This appears to be an ideal situation for both developers and crypto enthusiasts. However, it could still prove to be difficult due to potential regulatory regulations.

Conforming to regulatory standards is a way for DeFi programs not only to lose the essence of decentralization but also limit what they are able offer their customers.

Lai, on the other hand, believes the opposite and thinks regulations will strengthen DeFi. DeFi should be integrated into current KYC policies, he says.

The argument was made that even though the primary value proposition eliminates middlemen and reduces the cost for financial transactions, it is possible that illegal activity such as money laundering will still be pursued by consumers.

“Despite its unique value proposition by reducing the cost involving financial transactions, you still need to be fighting money laundering. So I think it’s okay to have the KYC element and AML element to be integrated into the current DeFi protocol. But it doesn’t really change the benefit of using DeFi, it just makes it even stronger,”
Lai explained.

Lai was cited as an example. She stated that the Bitcoin ETF is increasing in strength because there has been regulation. Lai believes that if all DeFi ecosystems can function in the same way as Bitcoin then they might be able to grow as strong.

DeFi Lego: The Future

Speaking on the most exciting part of the DeFi economy, Lai made reference to a term dubbed “DeFi Lego,” which basically refers to a situation in which different financial elements are interlinked within an operational space.

“So Imagine you have a bank and you go to a bank and they’ve got a different kind of elements. You got a credit card, you got a mortgage, you got different commodities. But right now what we’re talking about is we break down the bank features and sever it into small pieces,”
Lai is analogized.

Lai found that creating custom financial products is easy when you apply the DeFi framework (DeFi Lego).

Flipside

• There is currently no universal regulatory framework in place, which means that each country’s approach to regulating the crypto space and, by extension, the DeFi economy, may differ, resulting in inconsistencies for projects seeking global expansion.
• There is no way to rule out that DeFi-related projects might lose their core essence once they are regulated. This is especially true when different regulatory approaches will be used in different countries.

Why you should care

The regulation of the DeFi economy can make or break it. This is especially true if the objective is that even though the regulations are implemented, the majority of DeFi initiatives will still be decentralized.

The full interview can be viewed here

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