The first ever US congressional hearing into decentralised finance (DeFi) has highlighted the stark partisan divide over regulation of the emerging sector.First US Congressional DeFi Hearing Reveals Sharp Divide Over Regulatory Framework
The Democrats are focussed on reducing investor harms by cracking down on fraud and market manipulation, whereas the Republicans favour a lighter-touch regulatory approach intended to foster growth.
The landmark US Congressional hearing into decentralised finance (DeFi) took place yesterday, highlighting the stark partisan divide over regulation of the sector. On one side of the political fence, the Democrats are pushing for more regulation and consumer protections around DeFi. While the Republicans are urging a light-touch approach to encourage growth and innovation.
As part of the Democrats’ case to strengthen consumer protections around DeFi, Rep. Maxine Waters pointed to a recent scam involving the Trump family’s latest DeFi scheme, World Liberty Financial, in which investors lost around US$1.8 million (AU$2.7m).
Democrats Call For Protections, Citing Trump Family DeFi Project
The purpose of yesterday’s hearing, titled ‘Decoding DeFi: Breaking Down the Future of Decentralized Finance’, was to explore the potential risks and benefits of DeFi. But its main outcome was to ram home just how differently the major parties see the future of DeFi.
The Democrats are very much focussed on the risks of fraud and market manipulation and see protecting investors as the number one priority when it comes to DeFi.
As an example of these risks, Democrat Rep. Maxine Water of California cited the issues around the Trump family’s latest DeFi project World Liberty Financial. Last week several Trump family members had their X / Twitter accounts hacked and used to promote a fraudulent version of World Liberty Financial, urging people to invest. Unfortunately many people did indeed invest in the fraudulent project and lost an estimated US$1.8 million.First US Congressional DeFi Hearing Reveals Sharp Divide Over Regulatory Framework
Rep. Waters used this incident to highlight the importance of improving protections for DeFi investors:
Another DeFi project created by many of the same people behind World Liberty Financial, known as Dough Finance, was also hacked earlier this year leading to over US$2 (AU$3m) million in losses. There are reports that some of the code in World Liberty Financial was cut and pasted directly from Dough Finance.
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Republicans Insist DeFi Sector Must Be Allowed to Innovate
In contrast, the Republicans, led by Sub-committee Chair French Hill of Arkansas, insisted a light-touch regulatory approach to DeFi is essential to realise the potential benefits — such as increased financial inclusion and enhanced freedom for individuals to transact with each without reliance on intermediaries. Hill warned that a heavy regulatory burden could kill the nascent sector, saying:
Hill also warned that if the US takes a more restrictive regulatory approach to DeFi it may simply drive projects to other jurisdictions, limiting the potential benefit of DeFi to the US economy.
Related: FBI: Crypto Fraud Cases Increase by 45%, Reaching $5.6 Billion
Non-partisan industry representatives also testified at the hearing. The general view is more balanced: DeFi does need more regulation, applied carefully to avoid hampering growth and innovation.
Peter Van Valkenburgh, research director at non-profit cryptocurrency advocacy group Coin Center, testified that improved investor protections are required to combat widespread fraud, but invasive measures must be avoided to preserve users’ privacy and realise the technology’s benefits:
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