Regulating Decentralized Finance

Abstract

Abstract Decentralized autonomous organizations (DAOs) are communities of participants usually in permissionless blockchains or applications hosted on permissionless blockchains. Although they purport to be alegal organizations that do not conform to the legal and regulatory norms for legal organizations such as companies, these communities are experimenting with developing governance frameworks and norms that are innovative and not derived from traditional organizational and legal principles. However, their governance endeavors are often in response to problems and crises. This incremental development is also likely to be contrary to regulatory expectations, as financial regulation is increasingly extended to crypto finance. In the EU for example, where the Markets in Crypto-Assets Regulation has come into force for a range of crypto-asset activities that have financial implications, it remains uncertain if decentralized finance (DeFi) is caught within its scope. This chapter argues that regulatory provisions, whether or not they apply to DeFi for certain, can shed light on the expectations for governance development that DAOs that govern DeFi applications need to meet.