The future of DeFi ‘hangs in the balance’ as it faces Congressional scrutiny

The recent ‘Decoding DeFi: Breaking Down the Future of Decentralized Finance’ hearing by the House Financial Services Committee on September 10 revealed a division of Representatives down party lines.

Industry leaders at the hearing argued for exploring and adopting emerging Web3 technologies like DeFi, citing the positive impact of tokenization and blockchains on finance.   

French Hill, the Republican subcommittee chair, stated in his opening that substituting intermediaries for DeFi protocols would shift how transactions and financial markets were governed or structured. He supported the idea that DeFi technology could preserve a person’s freedom to transact. Democratic Representative Brad Sherman, however, claimed that DeFi was an effort to help billionaires evade U.S. taxes and hide assets acquired anonymously. 

DeFi’s future remains uncertain as lawmakers and industry leaders wrangle

Honestly feeling emotional after the first ever DeFi hearing in Congress today ????

I remember years ago when DeFi was like ten projects that no one thought would amount to anything. Now it's on full display in the halls of power in DC ????

This is *so* powerful from @amandatums ???? https://t.co/xfIjyoB5ua

— Jake Chervinsky (@jchervinsky) September 10, 2024

Despite crypto lawyer Jake Chervinsky’s excitement after the first-ever Decentralized Finance Congressional hearing on September 10, adopting and regulating DeFi protocols in the U.S. was a ‘tough nut to crack’ as Representatives from both divides disagreed about it. Chervinsky got emotional when he remembered how DeFi grew from merely ten projects to a conversation in DC. 

Mr. Hill advocated for a peer-to-peer ecosystem, citing Justin Trudeau’s crypto freeze for 2022 protester funding, which was ruled unconstitutional in a court. Sherman argued that DeFi would only support crime, evasion of sanctions, and evading taxes. Hearing witness and Director of research at Coin Center Peter Van Valkenburgh argued that crypto industry regulators had yet to provide comprehensive guidance on compliance and curbing tax evasion.

Van Valkenburgh thought that the existence of tax evasion did not warrant a financial system that would be 100% controlled and surveilled. 

“The Office of Foreign Asset Control (OFAC) has banned Americans from using certain DeFi software tools even for entirely domestic and legitimate purposes.”

–Peter Van Valkenburgh

Democratic Representative Maxine Waters, on the other hand, questioned the ability of the U.S. SEC and the CFTC to handle large-scale regulatory non-compliance. She mentioned the hacking of Trump’s daughters’ X accounts in an attempt to promote a scam token related to the Trump family’s ‘World Liberty Financial’ DeFi project.

A wide understanding of DeFi is the key to adoption and regulation

Mark Hays, Senior policy analyst at AFR (Americans for Financial Reform), pointed out that the DeFi and crypto industries were extremely predatory, highly volatile, and scam-laden, exposing investors to significant losses. While the chief legal officer at DeFi Education Fund, Amanda Tuminelli, praised DeFi as the ‘epitome of financial inclusion,’ Hays believed that the current securities laws should be applied to decentralized finance. 

According to Tuminelli, DeFi differed from and improved traditional finance because it did not rely on intermediaries. She added that treating DeFi like traditional finance or expecting it to function similarly would not work. Tuminelli affirmed that laws and regulations should consider the self-custodial nature and transaction anonymity of DeFi and digital assets.