DeFi’s First Day in Congress: Are Lawmakers Ready to Push Forward or Pull Back?

• The U.S. Congress discussed DeFi and the need for regulation for the first time on Sept. 10.
• The discussion was divided into pro-crypto and anti-crypto lawmakers and five industry witnesses.
• The hearing’s divergent perspectives suggest that a consensus is far from being reached.

In a watershed moment, members of the Congress gathered for the first time to delve into the complexities of decentralized finance (DeFi).

The congressional hearing , titled “Decoding DeFi: Breaking Down the Future of Decentralized Finance,” explored the benefits and drawbacks of embracing DeFi and whether it could be successfully integrated into the traditional financial system.

DeFi Discussion Start on a Contradictory Note

The nearly two-and-a-half-hour-long discussion began discordantly as lawmakers from opposing sides of the aisle presented vastly different perspectives on the potential of DeFi.

Representative French Hill, chairman of the Digital Assets Subcommittee, touted the benefits of DeFi, highlighting its potential to “shift the way financial markets and transactions are currently structured and governed.”

He envisioned a peer-to-peer future where individuals would have greater control over their finances, free from the whims of government intervention.

As a supporting argument, Hill cited the possibility of a future where, unlike in Canada, a prime minister could not freeze a citizen’s bank account simply for exercising their right to protest. The comments alluded to Justin Trudeau freezing the bank accounts of protesting truckers in 2022.

In stark contrast, Democrat Representative Stephen Lynch warned of the risks linked to DeFi.

He pointed to the Treasury Department’s report , which revealed that cybercriminals were exploiting DeFi’s purported “permissionless and interoperable payment networks” to launder illicit proceeds.

He argued that DeFi was susceptible to illegal activities because it was not compliant with terrorist financing laws. While Lynch advocated for DeFi’s anonymity and privacy, he said they could only be achieved legally and safely through policy change.

“Defi and crypto sectors cannot be trusted for what they promise. Instead, we should explore the policy changes to modernise the banking system.”

Supporting Arguments

The DeFi industry didn’t go unsupported at the hearing.

Five industry witnesses testified at the hearing, advocating for a comprehensive regulatory approach that embraces the sector’s unique aspects.

This included Brian Avello, CLO at principal investment firm UDHC; Rebecca Rettig, CLO Polygon Labs; Amanda Tuminelli, CLO at non-profit Defi Education Fund; Peter Van Valkenburgh and Mark Allen Hays, senior policy analysts at Americans for Financial Reform.

Rettig noted that the traditional financial sector can benefit from DeFi and called for a collective effort to minimize the risks associated with DeFi.

The Polygon Labs CLO underscored that the most crucial challenge in regulating DeFi is to ensure that any regulation does not force centralization into the system where it otherwise does not exist, as certain global regulators have suggested.

“There are ways to ensure regulatory goals, such as protecting users and combating illicit finance, in DeFi systems that differ from traditional finance,” she argued.

Tuminelli and Van Valkenburgh expressed concerns about high-profile enforcement actions, arguing that it stifles innovation in the U.S.

“The exponentially increasing amount of regulatory enforcement actions in recent years—which pay no mind to the details of the technology they presume to center on—have not accomplished any policy objectives or resulted in clarity for the industry,” Tuminelli added.

Maxine Waters Cites Trump Scam to Warn About DeFi Risks

While industry witnesses made their case for DeFi regulation, lawmakers swiftly shifted their focus to the sector’s risks, highlighting recent hacks and scams.

Representative Maxine Waters cited Donald Trump-backed DeFi project World Liberty Financial as an example of the dangers of DeFi.

The upcoming DeFi project recently made headlines for being embroiled in a fake giveaway scam after a Trump family member’s social media account was hacked.

Waters cited the case as a clear example of why lawmakers must consider implementing robust safeguards to shield users from exploitation. By taking advantage of the project’s high-profile endorsement, scammers were able to target unsuspecting potential users, she warned.

A Deep Division

DeFi’s first day in Congress marked a crucial moment in the sector’s evolution, but it also highlighted the deep divisions among lawmakers on how to approach regulation. As the hearing came to a close, many questions remained unanswered.

The path forward remains uncertain, with some calling for a more comprehensive approach to address the sector’s risks, while others advocate for a more laissez-faire approach to foster innovation.

The hearing’s divergent perspectives suggest that a consensus is far from being reached.

As the sector continues to grow and mature, it remains to be seen how lawmakers will choose to balance the competing priorities and priorities at play.