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How DeFi and yield farming going to stand the regulations pressure

The DeFi ecosystem is actively gaining momentum and is being scaled up with new services and functionality. New crypto opportunities are attracting more and more participants who are quickly realizing that decentralized finance is not just a separate direction of the crypto sphere, but a real threat to traditional financial markets.

Enthusiasts, traders, and developers have already appreciated the benefits of DeFi and they are ready to earn, create and learn in the new financial time. However, many are worried about the global regulators’ opinion, which could nip a multi-billion dollar industry in an instant. What do governments think about DeFi and yield farming? Will this activity be taxed? It’s difficult to ignore such a piece of the financial pie as yield farming, the total locked value of liquidity pools in projects of which is already approaching $8 billion and is not going to stop.

In this article, we want to describe the overall picture of the interaction between regulatory structures and the progressive crypto community. We’ll also make several hypotheses about how much the regulators are ready to take control of decentralized finance.

The system’s inflexibility is long decision-making or quick tightening the screws

The old piles on which the traditional financial system had stood for a long time began to rot. This became noticeable back in 2017 when cryptocurrencies gained such popularity. Regulators have changed their minds about digital assets more often than Paris Hilton changed her outfits in ’98. And only now the governments are working out specific rules for the new market regulation. But the crypto industry is not standing still. While governments were dealing with ICOs, this type of fundraising had already sunk into oblivion. This example clearly shows that the established system cannot quickly respond to new changes. Therefore, representatives of regulators rush from adoption to harsh bans.

Can you only imagine where the explosive growth of DeFi has put them in? Earning income through lending funds in a decentralized environment has become a bolt from the blue for those who are used to building rules and making changes to legislation for decades.

Thus, the DeFi popularity has taken financial regulators by surprise.

In June, the first online meeting with regulators and representatives of the DeFi market took place.

The video call was organized by the International Organization of Securities Commissions (IOSCO). Representatives of the main US regulators — CFTC and SEC also joined the event. Representatives of Uniswap and dYdX fought for DeFi’s interests.

CFTC Commissioner Dan Berkowitz suggested that many DeFi apps could be illegal, and Gary Gensler, chair of the Securities and Exchange Commission, said the sector poses a number of problems for investors and regulators.

At the same time, representatives of DeFi have openly stated that they would be glad to receive clearer guidance from regulators. However, they stressed that tightening the screws would lead to the collapse of the industry, on the basis of which a new financial system could develop.

What the participants in this meeting came to is unknown, since they refused to communicate with the media and still don’t give any comments.

However, already in August, the head of the US Securities and Exchange Commission (SEC) Gary Gensler expressed concern about new ways in which people enter the digital asset market and become crypto investors. Yes, it’s about DeFi. The SEC representative is especially interested in yield farming because the issuance and receipt of funds are carried out directly between individuals without using banks or other financial organizations as an intermediary.

According to Gensler, companies offering specific interest rates on a crypto asset should be under the control of the Securities and Exchange Commission. Moreover, the head of the SEC proposes to consider decentralized exchanges as mutual funds. Thus, the SEC will be able to freely regulate their activities.

Later, Gary Gensler said that the decentralized nature of projects does not give immunity from the agency’s oversight, and his words are confirmed by the SEC’s agreement with the analytical company AnChain.AI about monitoring and regulation of the DeFi sector. The contract amount is $625 thousand.

AnChain.AI specializes in tracking illegal transactions on cryptocurrency exchanges, DeFi protocols, and traditional financial institutions. With the help of this cooperation, the regulator wants to delve into the digital assets world based on smart contracts and understand how to further interact with progressive technologies without prejudice to itself.

How can DeFi react to volatile regulators’ opinions?

We see that the regulation mastodons are confused, but they try to jump into the car at full speed. It’s difficult to say what the attempt at regulating DeFi is. On the one hand, it may seem that this is a way to protect against fraud, but if you look at it from a different angle, such actions are similar to the fight against a possible competitor.

At the beginning of the article, we drew a parallel with the ICO development history. In 2017, the SEC equated tokens issued on ICOs to securities, as a result of which this market shrank.

Some representatives of the crypto business are confident that only large players will remain in this area, and after tightening the screws, the decentralized finance market will belong only to those who are willing to cooperate with regulators.

But we must understand that the future of DeFi depends on the details of restrictions. And most experts are sure that they will definitely be introduced, but there is hope for the fact that the head of the SEC looks positively towards blockchain technologies in general. If Gensler concentrates on protecting investors and doesn`t let the market stifle, then the sector will develop, but not so actively as now. There will be projects that will become completely transparent to regulators.

Of course, the nature of true crypto enthusiasts defies any restrictions and the inflexibility of the financial system gives DeFi and its members a head start. Therefore, in the near future, we are unlikely to feel a heavy regulating hand. While there is still every opportunity to receive income from yield farming, you need to do this. History proves that progress is always stronger than any restrictions.

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