In @BrianBrooksOCC FT piece "Get Ready for Self-Driving Banks" he articulates a vision in which regulators, transformed into software auditors, could examine DeFi-based algorithmic banks for compliance with banking regulations, or even issue them bank charters.
But... (1/6)
But... (1/6)
... it begs the question: why would a DeFi bank *care* whether it complies with a US banking regulations?
If a normal US bank is not compliant with banking regulations, a judge will eventually order them to cease operations. Implicitly, regulators wield a threat of force. (2/6)
If a normal US bank is not compliant with banking regulations, a judge will eventually order them to cease operations. Implicitly, regulators wield a threat of force. (2/6)
But how could a US regulator coerce a DeFi bank? If a banking regulator says "you must stop," Compound will respond, "says who?"
Max Weber defined the state by its exclusive monopoly on violence. Violence is highly coercive in the physical world, but on the blockchain... (3/6)
Max Weber defined the state by its exclusive monopoly on violence. Violence is highly coercive in the physical world, but on the blockchain... (3/6)
... it's useless.
So are regulators powerless against DeFi banks? Would Compound *really* not care whether it complies with US regulations?
I'd argue, no! Actually there's a lot of power that regulators could still wield, provided they use the carrot instead of the stick. (4/6)
So are regulators powerless against DeFi banks? Would Compound *really* not care whether it complies with US regulations?
I'd argue, no! Actually there's a lot of power that regulators could still wield, provided they use the carrot instead of the stick. (4/6)
Imagine that the US treasury decided to deposit funds into all compliant DeFi banks. Or, easier, they only allowed regulated institutions to deposit funds into compliant DeFi banks. The US govt, due to the sway it has over huge pools of capital, is a whale of a customer. (5/6)
I can easily imagine Compound's decentralized governance voting to comply with US regulations, purely to win the US govt's business.
In a sense, it's a rethinking of how financial regulators must regulate: not by threat of legal force, but by the outlay of good incentives. (6/6)
In a sense, it's a rethinking of how financial regulators must regulate: not by threat of legal force, but by the outlay of good incentives. (6/6)
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