He believes that advances in the use of blockchain technology in the financial sector defy current laws. According to Brian Brooks, it is necessary to regulate the technology rather than who operates it.

In recent days, Brian Brooks said that regulators need to rethink the way they make and enforce regulations. He made that point in the context of the advances of new apps and their use cases in decentralized finance (DeFi).

The US Comptroller of the Currency believes that regulators should create new rules, according to The Financial Times. They should set restrictions on the technology, rather than control who operates it.

He stated that most regulations currently create supervisory systems that only focus on people. “What we call regulation of banks is regulation of bankers,” he explained. This situation led the technologist and lawyer to state that DeFi is turning regulators upside down. The main reason for this is a market that operates with blockchain and that seeks to provide services without human intermediation.

DeFi Projects with Decentralized Exchanges

Brooks mentioned DeFi projects with decentralized exchanges, which allow trading without intermediaries or protocols for loans. Regarding these, he said that they do not involve loan officers or credit committees.

He classified these new financial entities as autonomous banks. These services allow giving and requesting loans, in addition to obtaining returns for providing liquidity on decentralized platforms, according to the official.

Besides, he said that they speculate on certain assets and insure against risks, among other operations, without resorting to intermediaries. To that end, most DeFi platforms rely on smart contracts.

“Under the current law, it is only possible to issue the letters to human beings,” said the comptroller. For this reason, the existing rules lead to outdated rules, which are inadequate in the face of technological advances.

Need to Review Current Laws

This situation generates a lack of regulatory clarity, without which “states can only produce a mosaic of inconsistent rules.” Brooks noted that this prevents “the orderly development of a national market.” This problem not only involves US supervisory agencies but those of many other countries.

Dan Larimer, former CTO of Block.one, the British company in charge of the EOS project, recently resigned. Concerns about regulatory pressures led him to make that decision since he considers them limiting for innovation and decentralization. Brooks agrees with this idea since he proposes to review these rules and focus on the management of technology.

He recommends that regulators train “examiners to read and test whether algorithms meet legal requirements.” In his opinion, this is the most appropriate way to regulate these autonomous banks.

Advantages that DeFi Offers to Users

One advantage of DeFi is that algorithms, rather than savers, are the ones seeking the best interest rates, according to Brooks. He says that some platforms even offer unsecured loans and delegate their lines of credit to other people.

However, the risk of illiquidity may increase due to depositors’ withdrawal of funds and the frequency of those operations. This situation puts these platforms at a disadvantage compared to traditional banks.

Regardless of this, the former director of the Coinbase exchange believes that it is possible to overcome all these problems. After all, the human brain is the one behind the law and the software.

“However, it is necessary to review the outdated rules, as well as the regulations that still require the use of fax machines,” says the US official.

By Alexander Salazar


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