Does decentralised finance equal deregulated finance?

DeFi is a fast-growing sector of the blockchain ecosystem. In this paper, readers are introduced to key concepts in DeFi, including use cases for the technology, differences between permissionless and permissioned DeFi, and the respective advantages of participating in DeFi vs. CeFi platforms. Unlike CeFi, in which a central platform or party acts as an intermediary to facilitate crypto asset transactions, DeFi protocols and platforms rely on self-executing smart contracts to perform their functions and do not custody their users' assets. Accordingly, there are open questions as to how DeFi can be regulated. Indeed, some declare that DeFi should not be regulated. This paper analyses the key arguments in favour of and against regulation of DeFi in the context of the recent crypto asset market instability, including a breakdown of various theories of liability under which regulators seek to identify bad actors and penalise harmful activity. It then synthesises recent statements and enforcement activity by US regulators, including the Commodity Futures Trading Commission, Securities and Exchange Commission, Department of Justice, Financial Crimes Enforcement Network and legislative activity, including President Biden's recent executive order, and the Lummis–Gillibrand Responsive Financial Innovation Act. To date, US lawmakers and regulators have viewed the label ‘decentralised’ with scepticism, applying a functional analysis to identify participants exerting various degrees of control over DeFi protocols in order to enforce regulations.