Regulating DeFi Platforms

Traditional financial systems rely on a dense network of intermediaries—banks, brokers, exchanges, and clearinghouses—that not only facilitate transactions but also serve as compliance gatekeepers. By implementing capital adequacy rules, disclosure regimes, and anti-money laundering and know-your-customer conventions, these entities constrain opportunism, provide reliable recordkeeping, and enable regulators to monitor systemic risk. Decentralized finance (“DeFi”) disrupts this model by replacing intermediaries with smart contracts: self-executing digital agreements that automatically perform transactions on blockchain or other encrypted computer code. While proponents tout DeFi as a more efficient and “purer” form of finance, its disintermediation eliminates the chokepoints that historically enabled oversight and consumer protection. As a result, DeFi magnifies familiar risks that fueled the Great Depression and the 2008 Global Financial Crisis, while also introducing novel vulnerabilities tied to computer code, governance, and cross-border anonymity.

This Article argues that because DeFi platforms disaggregate traditional intermediary functions, effective regulation must focus on (i) embedding compliance safeguards directly into platform design and (ii) holding accountable the actors who build, operate, and maintain those platforms. These safeguards are essential to preserve market integrity, mitigate systemic risk, and protect investors in the absence of conventional intermediaries. Specifically, regulators should develop reforms that require platforms to incorporate technological and governance tools that replicate the critical compliance and risk-management functions historically supplied by intermediaries. Constructing such a regulatory regime will require substantial multijurisdictional coordination, both in harmonizing regulatory expectations and in building cross-border enforcement capacity. Fortunately, a range of existing international coordination mechanisms can be leveraged to facilitate this global effort.