The DeFi Déjà Vu - Placeholder

History has shown an important interplay between financial innovation and regulation that can shed light on this movement to rearchitect the financial system in a more decentralized manner known as DeFi. There are several examples of this innovation that has led to economic transformation and regulatory obsolescence.

Limited liability and transferable joint-stock in late 18th century Britain

By limiting the liability of investors in the debts of the companies they funded, risk-taking was encouraged which was a necessary precondition for starting capital intensive businesses. Further, allowing these ownership rights to be readily transferred opened up the markets to a wider set of investors. These new capabilities came with a host of new problems created from the ensuing malpractice occurring from the lack of up-to-date regulations. Naturally, the government stepped in to require more stringent due diligence on market actors to help reduce fraud.

Financial crises of late 19th and early 20th-century U.S.

As the industrial giants emerged in the U.S. so too did developments around corporate governance structures as well as anti-competitive practices. With this came prominent legislations that still inform the regulatory landscape today with the Sherman Antitrust Act and the Federal Trade Commission Act.

1920's U.S. stock market boom and bust

Investment trusts proliferated in the U.S. allowing more diverse investment opportunities. However, many preyed on less-informed investors and the layers of risk compounded. When the market went south, investors were faced with crushing losses and once again the government stepped in to create monumental regulations such as the 1933 banking act which created the Federal Deposit Insurance Company (FDIC) and the 1934 Securities exchange act which created the Securities and Exchange Commission (SEC)

Financialization and deregulation leading up to the Great Recession

After Bretton Woods in 1971, there was a burgeoning of increasingly esoteric financial products, some of which were useful in managing risk, others simply masked it. These instruments played a pivotal role leading up to the global financial crisis. The lashing out against Wall Street that occurred afterward sparked Congress to enact the Dodd-Frank Act and Consumer Financial Protection Act creating the Consumer Financial Protection Bureau (CFPB).

Why it matters:

• While DeFi is creating an inherently new system, it fits into a common archetype of financial innovation that has created new assets/contracts and democratized the issuance, trading, and monetization of them. With this growth in products and services comes a lacking in the requisite standards and practices to properly regulate market activity. But DeFi is fundamentally different from the prior examples and part of its raison d'être is that it can’t be unilaterally regulated.