Crypto and regulators speak the same language when it comes to financial transparency

One of the problems that happens when an industry grows is that it becomes difficult to tell if everyone speaks the same language. Nowhere is this more evident than in the conversations between developers of decentralized finance (DeFi) and financial regulators. Can you find linguistic consensus on Consensus? That seems unlikely.

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

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And then you have situations like US Securities and Exchange Commission Chairman Gary Gensler asking crypto operators to “come in and register” with the agency and FinCEN advocating for stricter KYC/AML requirements across crypto.

Crypto, with exceptions, has largely promoted itself as a square peg that can’t fit into the round hole of the so-called Howey test (the guide the SEC uses to determine if something is a security, which essentially examines whether “public that investing is anticipating profits based on the efforts of others”).

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

“What does it mean to cooperate?” Boring asked. For 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 that this different definition was being explained away — not by lobbying or commenting on proposed guidance, she said.

Still, all is not lost for crypto in the U.S. In a panel discussion between Uniswap’s chief legal officer Salman Banaei, dYdX’s head of marketing 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 financial system (and that doesn’t necessarily mean non-custodial, permissionless apps will 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, bystanders cannot immediately know the identity of DeFi users, but given time and resources, the information can be determined – precisely the job of financial regulators.

This is not just marketing talk, Banaei came prepared with statistics. According to the FATF, the seizure rate for illicit funds within the traditional financial system is around 0.1% – meaning regulators have recovered about one thousandth of the funds known to have been used for criminal activity. Crypto seizure rate: 27%, according to Banaei.

This is not to say that crypto is a breeding ground for financial crime either. At least according to research firm Chainalysis, only a minimal amount of crypto transactions can be linked to criminal acts. What all this means is that if the government is concerned about terrorist financing or money laundering, it should probably choose crypto’s unprecedented transparency.

It turns out that crypto and its future overseers speak the same language.