World Economic Forum Seeks to Offer Clear Policy Landscape For DeFi
On Tuesday, the World Economic Forum (WEF) published its policy toolkit for Decentralized Finance (DeFi). Dubbed the Decentralized Finance (DeFi) Policy-Maker Toolkit, the release aims to offer policymakers useful guidance to help them navigate the swiftly evolving sector.
Exploring the DeFi World
The framework is expected to help government and industry regulators better examine the opportunities/risks the new technology introduces and grasp the major factors that should drive policy-making decisions.
DeFi is a disruptive technology that can permanently transform the existing financial system and bring financial services and tools to all. Interest in the sector grew rapidly during the Covid-19 pandemic, leading to accelerating investment from the private and public sectors.
Per the WEF report, the total value locked in DeFi smart contracts multiplied 18-fold over the last year, shooting up from $670M to $13 billion. The number of DeFi apps in the market also exploded, while user wallets interacting with these apps grew exponentially in 2020 to hit 1.2 million.
The new toolkit is the second released by the WEF covering the DeFi sector in detail and follows up on the initial release titled DeFi Beyond the Hype. The crypto world will be hoping that the report can help inform regulatory approaches to the space that are balanced, risk-aware, and forward-looking.
Breaking Down the WEF Toolkit for DeFi
The WEF framework provides an overview of DeFi along with a foundational basis for understanding vital issues concerning the regulation of the sector.
The WEF reportedly created the toolkit in collaboration with the Blockchain and Digital Assets Project at the Wharton School of the University of Pennsylvania. Industry experts, including global financial policymakers and DeFi entrepreneurs, were also consulted.
The report features recommendations from experts in the legal field, academia and representatives from the US financial watchdog FinCEN and regulators working on Europe’s Markets in Crypto-assets (MiCA) framework.
It includes detailed case studies, worksheets, and flowcharts highlighting the various opportunities and risks that policymakers must consider while approaching DeFi regulation.
Most policymakers agree that DeFi is ushering in a generational expansion of financial opportunity but are wary of certain dangers such as scams and smart contract breaches.
The WEF highlights the “market risk,” when asset value could drop over time due to various factors, including market conditions, idiosyncratic behavior or new market info or traders. There could also be “liquidity risk”, which can occur due to insufficient funds available to cover asset withdrawals.
Despite the cautious tone, the framework largely appears to foster fair, efficient and enforceable regulations for the DeFi marketplace.
“By outlining the potential risks, while highlighting the opportunities for innovation, we hope it will be a valuable resource in informing balanced approaches to policies and regulations,” noted Sheila Warren, Deputy Head of the WEF’s Centre for the Fourth Industrial Revolution Network.
Michael Mosier, Acting Director of FinCEN, echoed Warren’s views, adding that the toolkit would provide policymakers with a clear and comprehensive picture of the DeFi world, enabling them to “make the most of truly innovative opportunities for financial expansion and novel risk mitigation.”
Regulatory Clarity is Vital In DeFi Innovation
According to Galaxy Digital CEO Mike Novogratz, DeFi is on the verge of mainstream adoption and is only being held back by a lack of regulatory clarity. The CEO predicted that the institutional interest in DeFi would explode once regulatory concerns around crypto and DeFi are taken more seriously.
The WEF toolkit is a step forward for policymakers, industry players and governments to understand the evolution of DeFi. They should then adapt to it appropriately with frameworks that balance goals of regulatory regimes and innovation in the nascent space.