Many people have conflated the terms digital assets and decentralized finance (DeFi) as one, yet the two are fundamentally distinct. The former can be called the digital equivalent of property, while the latter is the financial system through which that property is transacted. Recent judgments of different common law jurisdictions have identified digital assets falling within the domain of property, providing an ex-post blanket protection to the hard earned money of the people.[1] This further led to other jurisdictions recognizing it through well-orchestrated laws including Pakistan, which has now recognized and regulated virtual assets through the “Virtual Assets Act, 2026”.[2] With all the development happening in these domains, the real challenge lies not in recognizing digital assets as property but in regularizing the very system of DeFi. It is widely recognized that the DeFi system was created in response to traditional centralized finance, because it offers decentralization and democratized access to investment.[3] However, the recent developments in terms of ex-ante laws are raising questions over the very purpose of establishing this altogether new system if we are going to apply the same set of rules to it.
Looking back at the history of banking, one realizes that P2P lending existed long before modern financial institutional banking. 17th-century French regional notarial archives are the living proof of how P2P credit lending was the normal practice even before banking networks could have a meaningful presence outside of Paris and other large cities.[4] Thus, today with the help of technology, we are simply resurrecting an old technique from the past. No doubt technology today has made the information storage and transmission million times faster than ever before. However, we are forgetting one thing that the financial system itself has become far more complex with time and modern banking actually developed in response to the risks created by the structure of the banking itself.[5] Many of the banking regulations we have today were ex-post in nature, introduced from time to time in response to financial crises faced by countries or the world. Indeed we humans, in order to escape from the loop, try to learn from our past mistakes and apply those lessons learned in our current experiments. Just like that, the centralized regulatory system, which was developed through an ex-post approach, is now setting the ex-ante regulatory approach in stone for the Defi system. This makes DeFi a system where regulatory development is less crises based and more centered around pre-set rules. We are actually seeing a bargain happening between centralized and decentralized systems with the risk-averse approach in mind. However, when system adopts risk aversive approach, it tends to follow the old pattern, and while following those old patterns, are we creating a different financial system? I don’t think so.
Let us just take one example of Public International Law, where the biggest problem the states are facing is the enforcement of sanctions. Despite the actions taken with the help of Society for worldwide interbank financial telecommunication (SWIFT) against Russia in the current Ukraine-Russia war, still a large number of funds were transacted using the decentralized system. This issue has not only raised new concerns with regard to enforcement of sanctions but also how the same will be catered in the new system.[6] In order to enforce such sanctions, should states apply the same financial action task force (FATF) rules that were used in centralized financial system or devise the new one.
Here another question arises, that if DeFi is regulated under FATF rules[7], then to what extent states can stretch those rules especially in the decentralized system where anonymity is ruling the transaction.[8] No doubt, in fully decentralized system, tracing the trade across decentralized ledgers is as difficult as finding the missing half of a pair of socks. Therefore, digital identity verification in this particular system becomes very crucial.[9] For this purpose the regulatory authorities have proposed using the intermediaries i.e. banks, broker or exchanges to ensure the AML/CFT compliance. However, when we step into identity verification domain, the stringent set of rules of know your customer (KYC) are not only discouraging people from participating but compromising this whole concept of decentralization and giving birth to irreconcilable duality. Where on one hand, we must regularize the DeFi to stop illicit funding, but on the other hand, this very regulation is simultaneously compromising its existence. In all the frenzy surrounding regularizing DeFi, we are forgetting that we are creating peer to peer (P2P) system without any intermediaries. Thereby, introducing intermediaries, we are simply making DeFi an extra limb of the centralized system and compromising its core purpose.
Therefore, simplifying the argument for P2P, by shifting the weight to the technological advancement is an amateur mindset, which is advanced simply to shrink the purpose of regulations in banking history. That’s why the skeptical approach adopted by many leading academics of this field may also seem correct to some extent. They question the very rational behind crafting the new system outside the existing one, particularly if it appears to create more problems than it resolves.[10] Many have said that re-imagining the legal structure around the decentralized system has to be different from the one that we have today. But despite re-imagining it differently, unluckily still in parts, we will keep facing the challenge of irreconcilable duality, which needs to be addressed from time to time. The financial system takes centuries to evolve and self-correct the errors; thereby, to say much about this system at this stage will be too soon. Whether we are stuck in a loop or actually going somewhere, only time will tell.
[1] AA v Persons Unknown [2019] EWHC 3556 (Comm) (17 January 2020), Poulton v Conrad [2025] TASSC 2 (7 February, 2025)
[2] UK Digital assets Bill, Scotland Digital Assets Bill, Virtual Asset Ordinance, Pakistan, GENIUS Act
[3] Larry Fink, 2025 Annual chairman’s letter to investors.
[4] Philip T. Hoffman, Gilles Postel-vinay and Jean Laurent Rosenthal, Dark matter credit-The development of peer-to-peer lending and Banking in France, Princeton University Press
[5] Ross Cranston, Principles of Banking Law, 3rd edition
[6] What do sanctions mean for the future of decentralized finance? | World Economic Forum
[7] Illicit Finance Risk Assessment of Decentralized Finance, U.S. Department of the Treasury, pg 32
[8] Fabian Schar “Decentralized finance: On blockchain-and smart contract-based financial markets” pg.171
[9] Supre note, 3
[10] Robert stevens, “Crypto is not Property”, Professor of Private Law, University of Oxford.
