Response to the Financial Services Regulatory Auth. of Abu Dhabi Global Market's Discussion Paper

The DeFi Education Fund submitted a comment letter last week to the Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM) in response to their discussion paper on decentralized finance (DeFi).

The FSRA issued the discussion paper “as a starting point for dialogues on how DeFi may be eventually regulated” because “while DeFi has had strong growth in both value and users since 2020, it remains largely unregulated and anonymous.”

Overall, the discussion paper’s 30,000 foot position is that “similar requirements should be placed on DeFi participants as on TradFi participants'' because “DeFi does not change the underlying nature of financial services.” But because decentralized and permissionless financial infrastructure is incompatible with regulatory requirements designed for financial intermediaries, the FSRA’s vision for regulating DeFi would amount “permissioned DeFi.”

In our response, we argue that FSRA’s approach is mistaken. We don’t need to reject the decentralized and permissionless character of DeFi to achieve key policy objectives in the DeFi ecosystem; policy objectives can still be accomplished in ways that do not require eliminating the core innovations of DeFi protocols.

Achieving policy goals in light of new technologies and innovations regularly induces the consideration, development, and adoption of novel regulatory approaches. The emergence of DeFi should be no different.