Vardan Khachatryan - DeFi & Law: What Regulation Should and Shouldn’t - TOKEN2049 Dubai 2025

It's a pleasure to be here in front of you and to discuss a very important topic today which is DeFi and how they should and should not be regulated. Um the DeFi nowadays is becoming more of a marketing name that we or a lot of the companies are labeling their products to sound more cryptolike or decentralized like and but the promise initially of DeFi was not that. What was the promise to have immutable smart contracts that nobody can actually alter stuff? Permissionless financial access that will give the anyone who has an internet to have an ability to interact with these smart contracts and make financial transactions. decentralized governance where the community would actually decide the faith of the DeFi products and protocols and transparent and unstoppable infrastructure that even the de developers, deployers and the regulators could not stop this product to operate.

The reality today however is quite different. What do we see nowadays? We see upgradable contracts with admin keys meaning the developers have always the ability to change some things in the protocols. We see that the team who is developing these D5 protocols are also extracting a lot of the fees and profiting from this. Uh we also see a lot of centralized sensorable uh front ends like websites that can be altered by the teams and also Dows which are DAO only with their name in reality they are just controlled by few people.

When we talk about the control and regulations, we need to understand that the more control you have over your DeFi, the more you regulated you're going to be. So everything when we talk about the regulation is related to the control how much control there is in the hands of others. If we are going towards the totally uncontrollable permissionless protocols then there is no regulation. There should not be regulation. If we are talking about more control the more control we give let's say your updatable contract you are being governed by few people you have centralized interfaces there should be more regulation.

The real world lessons are famous. We had already cases of defies being treated in the legal way. Let's say um a decentralized lending b and borrowing protocol uh which was with in the hands of few multisigs was considered by the regulators as a custodian lender because it's it's not what the defi's whole meaning was right if it's controlled by someone of course they should be regulated by the regulatory bodies or another case when the decentralized exchange was pushed to delist some coins because their interface was centralized. Another issue is the Dows when they governed by few of the people like 60% of the voting power with the was with the hands of few. So that's making completely the whole Dow um structure centralized.

Hence also putting the whole team under the legal scrutiny and class action of course can be there for the breach of fiduciary duties because then you owe fudiciary duty. So what regulation should actually do? The regulation should be set in a way that is fostering the growth of decentralized finance which is actually regulating by functional control not by the labels. Meaning like if you label something as DeFi, that doesn't mean that you're out of control and you're out of regulatory frameworks. You're out of the touch of the regulators.

But only when you show that you have no control of this, then that protocol should not be regulated. The truly decentralization should be protected by the law and it should be encouraged to the progression of decentralization. Meaning we should not punish people for creating permissionless protocols but we should help them to foster this. So what the regulation must avoid? Regulation should not put licensing or bank-like treatment to defies that are not necessarily banks or centralized bodies.

We should not force into legal financing licensing of the defies and we should not push transparency and openness for things which do not need to be. So so we do there is no need to have a KYC on a fully decentralized protocol. And if we fail to act, what's going to happen? The DeFi are going to be taken over by the incumbents, by the financial intermediaries. The permissionless innovation will be replaced by permission platforms.

The open-source builders will be driven out by the complex licensing regimes. they will be forced to go through the similar path as the existing financial intermediaries and decentraliz become just a marketing term which is actually what we see now unfortunately. So we have actually a road which has two paths and we should understand which path we are taking. The one that is true decentralization the genuine defi or the one that we just use a term as defi as a marketing term but in reality is just a onchain centralized finance and the path is actually the choice is yours. So the vision for the next decade should be the following.

DeFi protocols that are truly immutable. So the genuine DeFi which are censorship resistant and community governed should emerge. The open infrastructure treated as public good like the internet. So the defi should be treated like any other like internet protocol right because there is no need to regulate the internet the fact that some people can use the internet for some illicit activities that doesn't mean you should limit the internet or regulate the internet the same goes for defi okay when the question comes from the regulator side um and the regulatory frameworks that should be focusing on more towards regulating those financial services which are blockchain based but are under the control of you and should not regulate those that are actually out of the control. So the essence of the decentralization is that your code your protocol should outlive you.

Meaning that if you need to if your protocol cannot survive after you or needs your presence, your actions, your updates, then it's not a true defi. Thank you.