DEX self-regulation
Yuliya Guseva's recent paper Decentralized Markets and Self-Regulation advocates for government-sanctioned self-regulation in crypto trading, covering both centralized exchanges (CEXs) and decentralized exchanges (DEXs). The case for CEX self-regulation is relatively straightforward and has been made before. However, extending this idea to DEXs is likely to face significant resistance. I'd like to explore Guseva's proposal to see how this resistance might be mitigated.
Before diving into Guseva's proposal, it's worth noting a real-world example of "self-regulatory" collaboration in crypto. The MEV Fair Market Principles, released by the Proof of Stake Alliance in 2024, tackled a contentious issue where many might have expected little consensus. As someone involved in drafting those Principles, I was struck by how constructively many market players engaged. This experience opened my mind to the potential of Guseva's approach.
That said, this kind of voluntary effort has its limits. The MEV Fair Market Principles are one of only a few such documents. It seems the market isn't producing enough of these "public good" guidelines on its own. This is where an organization specifically tasked with developing such standards, as Guseva suggests, could make a real difference.
Guseva's core argument is that DEXs need to be brought into a clear regulatory framework. This is because they're deeply connected to CEXs, and risks can spill over into traditional regulated markets and even the broader economy. She points out that today's enforcement-heavy strategies for DEXs fall short. It's tough to go after anonymous or international developers, new DEXs can be spun up easily using open-source code, and we might soon see algorithmic entities operating DEXs with minimal human input.
So, what's Guseva's solution? She suggests an overarching Self-Regulatory Organization (OSRO) should play a key role. This OSRO would not initially impose a specific regulatory or liability regime on DEXs or their developers. Instead, it should focus on:
- Crafting high-level standards and best practices for decentralized platforms and the people building them.
- Publishing "whitelists" of DEXs that meet these standards. This would give traders a clear signal about a platform's quality and compliance, potentially shifting liquidity away from riskier, non-compliant venues.
- Nudging future DEX developers to build with these standards in mind.
- Possibly introducing a tailored registration or certification system for certain DEXs down the line.
- Backing up the developer community's own efforts to solve transactional and regulatory puzzles by offering a baseline for coordination.
This approach aims to incentivize developers, including those who are difficult enforcement targets, to create DEX protocols that address inherent risks. The goal is to foster a more coordinated and coherent approach to the risks posed by both CEXs and DEXs within the interconnected digital asset market.
For Guseva's vision to work, it hinges on a key assumption: that the crypto world will increasingly value trustworthiness. If that happens, market pressure could be enough to get developers and platforms to voluntarily adopt the OSRO's standards and even collaborate to keep those standards cutting-edge. Whether this demand for trustworthiness will truly materialize is an open question, and getting an OSRO off the ground would definitely take some institutional entrepreneurship. Personally, I think it's an idea well worth pursuing.