In a Congressional hearing on decentralised finance (DeFi), US lawmakers revealed a stark divide over the future of crypto-based financial systems. The House Financial Services Committee's hearing, titled Decoding DeFi: Breaking Down the Future of Decentralized Finance, provided a platform for both advocates and critics of DeFi to voice their perspectives.
The two-and-a-half-hour session exposed a clear split between Republicans, who supported DeFi's potential to decentralise and democratise finance, and Democrats, who focused on concerns around crime, scams, and tax evasion.
Pro-DeFi Advocates Push for a Peer-to-Peer Future
Republican subcommittee chair French Hill opened the hearing with a strong endorsement of DeFi’s potential, stating that it could replace traditional financial intermediaries with autonomous, self-executing code. Hill emphasised a vision for a "peer-to-peer future" where individuals would not be at risk of having their bank accounts frozen for political reasons. His comments referenced the 2022 freeze of crypto donations to Canadian protesters, an act later deemed unconstitutional by the courts.
Crypto industry advocates, including Peter Van Valkenburgh, director of research at Coin Center, argued that regulators have failed to provide clear guidance for compliance, making it harder for DeFi platforms to adhere to current laws, a common sentiment. Valkenburgh further emphasised that while tax evasion is a concern, it does not justify a financial system under constant surveillance and control.
Amanda Tuminelli, chief legal officer at the DeFi Education Fund, took the opportunity to highlight DeFi's inclusive nature, noting that it opens up financial access to anyone with an internet connection, bypassing the gatekeepers of traditional finance.
Critics Focus on Crime and Regulatory Non-Compliance
In contrast, Democratic lawmakers expressed deep concerns about DeFi's role in facilitating illicit activities. Representative Brad Sherman, a prominent critic of crypto, argued that DeFi primarily serves as a tool for billionaires to evade income taxes. He characterised the technology as part of a broader effort to undermine tax enforcement.
Representative Maxine Waters raised security concerns, pointing to high-profile hacks involving the Trump family’s DeFi project, "World Liberty Financial." Waters questioned whether regulatory agencies like the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) could adequately regulate DeFi platforms given widespread non-compliance.
Mark Hays, senior policy analyst at Americans for Financial Reform, described DeFi as a "volatile, scam-laden" industry that exposes investors to significant financial risks. Hays called for existing securities laws to be applied more rigorously to the DeFi space, echoing concerns over the lack of accountability.
DeFi at a Crossroads
The hearing provided a glimpse into the ongoing debate about how DeFi should be regulated in the US despite the passage of the Financial Innovation and Technology for the 21st Century Act (FIT21) (which mostly focuses on centralised crypto intermediaries) through the House in May this year with significant bipartisan support. Advocates on both sides are split with proponents focusing on the potential benefits of peer to peer technology and detractors focusing on security and financial crime risks. The potential for DeFi to disrupt traditional finance also poses challenges to existing regulatory and financial interests. With DeFi platforms, like Uniswap, coming under increasing pressure from regulators, the fight for a more open and transparent financial system remains real and pressing. The outcome of the next US election cycle may well have a significant impact on the shape of future legislation and regulatory enforcement, with likely ripple effects beyond the United States including on our own shores.
By Steven Pettigrove and Luke Misthos
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