Regulate Crypto Apps Not Blockchain Protocols: ConsenSys to UK

Open source blockchains are purpose-agnostic, so regulating front-end crypto apps makes more sense, ConsenSys has told the UK Treasury

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Consensys founder Joe Lubin | MoneyConf (CC license)

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ConsenSys, the long-serving Ethereum development studio, wants UK authorities to focus on regulating applications rather than blockchain protocols directly.

The firm made the recommendation in response to a UK inquiry into decentralized finance (DeFi) and crypto activities.

In a letter published Tuesday, ConsenSys proposed a more targeted approach of regulating public-facing blockchain applications to address any potential risks. This approach would be similar to how the Web2 internet is regulated.

The firm suggested that rather than imposing artificial limitations on blockchain infrastructure, specific activities and services can be directly regulated.

“It should be, and is more practically regulated if, those products or services that pose risks that are regulated, not the purpose-agnostic open source code,” ConsenSys said.

According to the Brooklyn firm, it’s important to pay attention to how much control certain people or groups have over DeFi applications. If someone can access private keys or interfere with smart contracts, it can be risky. Regulations should address these concerns while still allowing for innovation and gradual decentralization.

ConsenSys added that maintaining data integrity off-chain is one challenge that should be kept in mind when forming regulations.

While data on the blockchain can be verified, external data from the real world or added through oracles lacks the same certainty.

ConsenSys joins UK crypto chorus

Another challenge is determining the size of the UK market for DeFi. Since protocols are accessible globally, it’s difficult to measure the true extent of a particular country’s involvement in a specific protocol, or even DeFi overall.

But metrics like the number of UK-based Web3 developers and the usage of unhosted wallets (read: self-custody wallets) in specific regions can provide insight into how individuals in the country are involved in DeFi, the letter said.

The UK Treasury has already received a number of responses from other prominent members of the crypto community, including a16z, Polygon Labs, Circle and Binance.

The government will review feedback received and use it to shape its regulatory response. If they decide to move forward, they will issue additional consultations on specific rules in collaboration with UK authorities.

Andrew Griffith, a financial secretary to the UK Treasury, said in an April interview that crypto regulations would be nailed down in the next year or so.


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