As the world of decentralised finance (DeFi) continues to evolve and expand, new projects such as Central Bank Digital Currencies (CBDCs), tokenised deposits, and stablecoins are faced with a common challenge: spending their initial investment sparingly until business viability. The road to business viability is not without its hurdles and the more successful these projects become, the more they attract the attention of regulators. To ensure the long-term success and viability of these innovative projects, a regulator-first approach is crucial.
One prime example of the importance of regulatory approval is Fnality, a systemic payments system based on Hyperledger Besu that required a Central Bank account to settle in Central Bank Money. Fnality was granted this account only after undergoing extensive reviews of its people, processes, policies, architecture, and business plan. Another example is the Digital Securities Sandbox (DSS) run by the Bank of England, which allows new fintech projects to gradually scale their operations while building up compliance.
These cases highlight the need for DeFi projects to prioritise regulatory compliance to secure the necessary approvals and ensure their operations are not hindered. This often involves establishing new organisations that adhere to regulatory requirements, which necessitates a clear articulation of not only the project’s technical aspects but also the operational and legal aspects as well. In addition to satisfying the regulator, this articulation is essential for several other audiences:
- Investors: Demonstrating a well-defined operational structure reassures investors that their investment has a higher likelihood of generating returns.
- Participants: Knowing they are working with a well-run platform fosters trust and confidence among participants.
- Business Partners: As most DeFi projects aim to be composable and integrated, partners need to have faith in the platform’s operational structure.
- Employees: Clearly defined operations enable employees to effectively run the platform and contribute to its success.
By prioritising regulatory compliance and focusing on early definition of operational aspects, DeFi projects can secure the necessary approvals more quickly and efficiently. This not only helps extend the cash runway but also contributes to the overall success and sustainability of the project. In the rapidly evolving world of decentralised finance, a regulator-first approach is critical for building trust, fostering innovation, and ensuring the long-term viability of these ground-breaking initiatives.
