In their recent opinion piece for Cointelegraph, 1inch Chief Compliance Officer Hedi Navazan says that, being clear in regulations and based on risk, will help in continuing the development and security of the Web3 and DeFi. This regulation does not impede in innovation, according to Navazan, well regulated regulation can be used to liberate DeFi from what it can become but protect users.
Challenges in DeFi Regulation
According to Navazan, the problems inherent to the utilization of traditional financial regulations in the DeFi sphere, have been identified, while it is rarely the case that a targeted financial regulation is suited for dealing with peculiarity of decentralized systems. Coinbase and Binance in the past have been facing unlimited legal actions too, increasing the uncertainty. There were, however, other actions taken to show a more defined regulatory line, such as the Securities and Exchange Commission’s dismissal of a lawsuit against Coinbase.
The Role of Self-Regulation
The article asks the DeFi industry to create self regulation. Platforms can prevent this illicit activities proactively by having robust security like transaction monitoring, disk screening and blacklist mechanism. But these own standards not only improve security but also to activate the users’ and regulators’ trust.
Institutional Adoption and Regulatory Clarity
Navazan claims that by making this point, institutional players are more likely to get involved in DeFi when there are obvious ways to frame the business. Specific is the example the Markets in Crypto Assets (MiCA) regulations in Europe in providing more clarity for businesses to work within the EU without the having to go through the additional work. That would, however, increase the compliance costs, but in fact the compliance costs may fix an unrelaible ecosystem thereby luring institutional capital.
Bridging DeFi and Traditional Finance
To properly enable DeFi within traditional banking systems, DeFi’s products had to establish the ability for traditional banking systems to rely on and use DeFi’s products with little regulatory uncertainty. Navazan suggests that by clearly defining the regulations, DeFi would even be seen as a facilitator for such integration. In January 2025, a repeal of Staff Accounting Bulletin 121 will take place, which previously has applied accounting obligations on banks holding crypto assets, and therefore could be considered one positive step towards integration of crypto assets to the banking framework.
Encouraging Innovation Through Regulatory Sandboxes
Such sandboxes, where a company can test a product within a controlled environment subject to supervision by the regulator is therefore advocated in the article. In the United Kingdom, for example, such initiatives have already been proven successful toward accelerating innovation while still maintaining compliance. The European Union’s Distributed Ledger Technology (DLT) Pilot Regime too, similarly, will create a regime in which market entry for startups is made easier by reducing ‘upfront’ compliance costs.
Conclusion
Navazan found that if it is done carefully by way of thoughtful design and implementation, regulations are not the roadblocks to the Web3 space, but are in fact catalysts. Becoming a sustainable making DeFi industry possible is only through having a collaborative relationship that brings together regulators and innovators.
