Abstract

Continuous boom-bust cycles in the digital assets ecosystem, including the ‘Crypto Winter’ of 2022-2023, suggest that legal ordering—in the form of external and/or embedded regulation—for crypto, digital assets, and decentralized finance (DeFi) is necessary to mitigate the threats posed by ill designed crypto projects, safeguard investors against financial misconduct, and support the balanced future development of the market going forward. While a comprehensive international framework for the regulation of digital assets and crypto appears to be emerging, both the international guidance and domestic approaches so far exclude fully decentralized systems. The regulation and governance of ‘true’ DeFi thus remains a significant topic of discussion.

A central ambition of DeFi protagonists is to create peer-to-peer financial systems and applications that are self-executing and independent of state action. Yet, the paradox of decentralized practices and communities is that they require some centralized, shared understanding of how members within that community should behave—the rules and protocols that will hold them together in a kind of aporia. While DeFi protagonists may finally have the technological innovations that enable the creation of such systems, questions remain as to how these normative orders will and should be governed. Indeed, the development of governance rules, processes, and procedures could be the building blocks for the construction of a legitimate legal order beyond the state. But without state institutions to facilitate governance functions such as the administration of justice, dispute resolution, and market supervision, questions remain as to how DeFi can effectively address these challenges in a way necessary for the market to develop successfully going forward.

Keywords: Crypto Winter, decentralized finance, crypto, digital assets