Policy leaders say it's early days for DeFi in D.C. But big questions loom if its profile rises

In recent weeks, The Block has spoken with members of Congress and the Securities and Exchange Commission (SEC) about the ways in which policymakers view the growth of the decentralized finance (DeFi) ecosystem.

The short answer — for the most part, they aren’t really engaged, at least not yet. But those in D.C. attuned to the world of blockchain see the coming wave, and they all have similar thoughts on DeFi. They say it's early days for Open Finance, but it'll bring bigger questions when the wave crests.

The “Summer of DeFi” saw the rise, and sometimes fall, of protocols like yam, yEarn, SushiSwap and Curve. Total value locked climbed above $8 billion and decentralized exchange (DEX) Uniswap began doing volumes comparable to that of centralized exchanges (CEXs). Still, DeFi isn’t widely talked beyond those who were already paying attention to the party, which, according to lawmakers, means it could be a while before anyone makes a sincere attempt to tamp it down.

A few billion dollars in growth over the course of a few months is a lot, but explosions are relative, and the DeFi boom isn’t big enough to shake loose attention from traditional markets yet. 

“If it got even bigger, then I think you'd see more regulatory attention, but that's not to say that there isn't any regulatory attention being paid,” said SEC Commissioner Hester Peirce.

Similarly, U.S. Representatives Darren Soto, Tom Emmer and Warren Davidson — all members of the Congressional Blockchain Caucus — said the same. In a summer when lawmakers dealt with so much unprecedented activity, and particularly during an election year, the unprecedented growth of a corner in the digital asset ecosystem flew under the radar, especially as most of those in Washington are still grappling with the basics of digital assets, let alone the more opaque aspects of Open Finance.

That's not to mention the 2020 presidential election in the U.S., which today is in full swing.

In fact, although the officials with whom The Block spoke are arguably the most crypto-educated members of their respective bodies, each highlighted the need to educate themselves further on DeFi. All said they were looking forward to speaking with minds in the space, but that as of yet, the DeFi world largely hasn’t come knocking on any Washington doors. 

For that reason, even those who are more familiar with DeFi were wary of talking policy specifics. Emmer and Soto said it was too early to think about fleshed out proposals since DeFi itself is still finding its footing and protocols are growing to understand exactly what they’re trying to accomplish and how to decentralize sufficiently.

"And for the moment, that's a good thing. These nascent markets need time to grow," said Soto.

Many of the policy struggles, lawmakers said, boil down to definitions. Soto and Davidson highlighted their Token Taxonomy Act, which would firm up language around digital assets. It’s a text that opens the door to future discussions on what these assets are and what guardrails they might require. 

Similarly, Peirce said she’s seen the recent growth as an opportunity to pin down further what “decentralized” actually means. For now, it seems these projects are trying to do something separate from 2017 initial coin offerings, according to Peirce, and coupled with the abstraction of a central point of blame, regulating these projects could prove a new challenge for the SEC.

She said DeFi is attempting to do something less easy to categorize, and though those conversations will happen eventually, more maturity in the space could help flesh out key definitions.

But once those conversations do happen, Emmer and Davidson said the idea of centralized control will be at the center of the debate. DeFi will likely be the battleground for discussions about whether or not centralization in any space, even outside of finance, is the way forward. 

Davidson said that DeFi gets to the heart of the question of whether the U.S. wants a future with third parties or without them. Similarly, Emmer touted the opportunities DeFi presents to abstract some of the control that has intervened, affecting the value of assets, like the Federal Reserve’s use of interest rates to stave off a long bear market. Though he said Congress likely wouldn't address its capabilities for a while, Emmer said he’s thinking about how more decentralized forms of transacting could create more “immutable” value in the financial system.

In the meantime, all told The Block that DeFi’s D.C. floor time is coming down the road, but not for a while. Until then, it’s a matter of educating themselves, their colleagues and continued growth in the space. For now, the party will continue widely unchecked, but there are those in D.C. who are keeping an eye on things.