Regulate Crypto Apps Not Blockchain Protocols: ConsenSys to UK

Regulate Crypto Apps Not Blockchain Protocols: ConsenSys to UK


ConsenSys, the long-standing development studio for Ethereum, wants the UK government 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 to regulating public blockchain applications to address potential risks. This approach will be similar to how the Web2 internet is regulated.

The firm suggested that instead of imposing artificial restrictions on blockchain infrastructure, specific activities and services could be directly regulated.

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

According to the Brooklyn firm, it is important to consider how much control certain individuals 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 allowing for innovation and gradual decentralization.

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

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

ConsenSys joins the UK crypto chorus

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

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

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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 go ahead, they will issue further consultations on specific rules in conjunction with the UK authorities.

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

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