Why Is the US Government So Afraid of DeFi?

Decentralized finance, or DeFi, is still an emerging piece of technology that can significantly benefit the world of finances. DeFi is based on the technology behind cryptocurrencies — the blockchain or, more specifically, distributed ledgers.

This effectively eliminates banks and central authorities from the picture and the fees. In addition, it lets users keep money in digital wallets where they can transfer funds with only an internet connection.

The importance and benefits of DeFi are more than apparent. Unfortunately, however, the US government is often antagonistic or, at the very least, overly cautious with this technology. This piece aims to uncover why this is the case, whether it will change, and what the future will bring.

US Government and Cryptocurrency — History

As stated, DeFi is based on the technology behind cryptocurrencies, so it’s essential to examine the history of crypto in the US to understand the government’s reaction to DeFi.

When Bitcoin first emerged, the US government didn’t pay much attention to it. It was only when it and the rest of the crypto market grew stronger that the government started creating regulations.

At first, these were only guidelines, but as soon as criminals started using Bitcoin to facilitate payments, the US government began working hard to seize Bitcoin assets and looking for ways to ban the crypto. At one point, the FBI seized more than 26,000 bitcoins from a darknet online marketplace called Silk Road.

Once crypto survived the initial antagonistic response, it proved that it was more than just a way for criminals to make payments. Experts started praising crypto, exchanges grew in scope and power, the value of the market skyrocketed, and legitimate businesses started seeing crypto’s potential.

It didn’t take long for the US government to change its stance, and it started introducing laws to regulate the market. In 2021, as many as 17 states introduced regulations for crypto, and the federal government actively started looking for ways to completely regulate the sector and bring some order to the continually growing market.

At the same time, the value of Bitcoin and many other cryptos skyrocketed. The government’s increasingly positive stance certainly played a significant role in this.

So, since the government changed its stance on cryptocurrencies, why is it being hostile to DeFi?

US Government’s Stance on DeFi

DeFi started attracting the attention of authorities and regulators as soon as the US crackdown on Binance was over. If you’re wondering why this is the case, the situation is clear — DeFi is not like crypto. It deals with traditional finances, and the government is never ready to cede financial control to anyone.

The US and its regulators are also concerned that DeFi doesn’t have to be as decentralized as crypto. The makers of specific DeFi solutions might not want it to be decentralized. The US government is naturally worried that this may lead to less desirable outcomes or downright scams on US citizens.

Naturally, most DeFi projects are entirely legitimate, as with crypto. However, regulations are still necessary; for now, no one knows what to do. The problem is that most rules in the financial realm are made for centralized business, and DeFi is anything but that.

The vast majority of regulators in the US understand the benefits of DeFi, just as they have come to realize the advantages of crypto. However, they are not convinced that they can trust this sector to manage financial crime and other financial risks on its own.

Future of DeFi

For now, it’s unclear where the regulations will go. As you’ve seen, no one can find a solution at the moment. DeFi must remain decentralized to function, but the US government also must implement some rules and regulations.

The good news is that some businesses have already received the green light to operate, offering a glimmer of hope for the market.

SOMA.finance, a multi-asset DEX and token issuance platform, has gained regulatory approval from SEC and FINRA to offer tokenized securities to its users. Naturally, this wasn’t easy to get; the company had to deal with the agencies for more than two and a half years, moving from a hard no in the beginning to regulatory approval in the end.

This can only mean that other businesses can achieve the same thing if they offer something that the US government can be confident will be a good and safe opportunity for US citizens.

Thus, organizations must work hard to gain approval from the appropriate agencies and the US government. For now, it will undoubtedly be on a case-by-case basis, but the whole industry needs to work toward finding a middle ground with the authorities. Cooperation and understanding will only benefit the sector, the users, and the government — we only need to get there.