Crypto and Regulators Are Speaking the Same Language When It Comes to Financial Transparency

One of the issues that happens whenever an industry grows is it becomes difficult to tell if everyone is speaking the same language. Nowhere is this clearer than in the conversations between builders of decentralized finance (DeFi) and financial regulators. Can linguistic consensus be found at Consensus? It seems unlikely.

For the most part, financial watchdogs in the U.S. (and the international bodies that are essentially offshoots of the U.S. Treasury Department) have said crypto clearly fits into the existing regulatory framework. Crypto’s governing rules have already been written, supposedly.

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And so, you have situations like the U.S. Securities and Exchange Commission chairman, Gary Gensler, telling crypto operators to “come in and register” with the agency and FinCEN advocating for stricter know your customer/anti-money laundering (KYC/AML) requirements across crypto.

Crypto, with exceptions, has largely promoted itself as a square peg that cannot fit in the round hole of the so-called Howey Test (the guidance the SEC uses to determine whether something is a security, which essentially probes whether "the investing public is anticipating profits based on the efforts of others”).

This is one of the sticking points for Chamber of Digital Commerce founder and CEO Perianne Boring, who spoke Wednesday at Consensus’ Mainstage. In crypto the terms “community” and “collaboration” are thrown around a lot – terms that mean one thing to insiders, and another to regulators.

“What does it mean to work collaboratively?” Boring asked. To the SEC the answer doesn’t matter; when a group of people organize to build a potentially valuable system, it “triggers our laws,” she added. At least on stage, Boring didn’t seem confident this different definition cold be explained away – not by lobbying or commenting on proposed guidance, she said.

Still, not all is lost for crypto in the U.S. In a panel discussion between Uniswap’s legal chief Salman Banaei, dYdX’s marketing lead Nathan Cha, Maple Finance co-founder Sidney Powell and The Defiant founder Cami Russo, the decentralized finance advocates were adamant that regulators will come around to the power and purpose of DeFi.

Regulators and DeFi advocates are on the same page. They both want increased transparency within the finance system (and that doesn’t necessarily mean that non-custodial, permissionless apps will all eventually add KYC procedures). Instead, what regulators try to do with the written word, DeFi can do through code.

You’ve heard the argument before. DeFi provides real-time auditability, an immutable record of transactions and the ability to easily track users. As designed, on-lookers may not immediately know the identity of DeFi users, but given time and resources that information can be determined – precisely the job of financial regulators.

See also: Kristin Smith Sees 'Bright' Outlook for U.S. Crypto Policy

This isn’t just marketing speak, Banaei came prepared with statistics. According to the Financial Action Task Force (FATF), seizure rates of illicit funds within the traditional financial system are around 0.1% – meaning regulators have recaptured about one-thousandth of the funds known to have been used for criminal activity. The seizure rate for crypto: 27%, according to Banaei.

This isn’t to say crypto is a pigpen of financial crime either. At least according to analytics firm Chainalysis, only a miniscule amount of crypto transactions can be tied to criminal actions. What all this means is that if the government is concerned about terrorist financing or money-laundering, it should likely opt for crypto's unequaled transparency.

It turns out, crypto and its would-be overseers are speaking the same language.