Regulatory sandboxes: a public policy to steer the market away from decentralized finance (DeFi)?

The swift expansion of Decentralised Finance (DeFi) has garnered increased scrutiny from regulatory bodies due to its potential risks and the absence of a central entity that can be held accountable. While DeFi offers certain benefits for the trading of security tokens, its decentralized structure challenges current regulatory systems that depend on centralized oversight. Global standard-setting bodies have therefore intensified their calls for regulators to address DeFi-related vulnerabilities. This document thoroughly analyses the difficulties associated with DeFi and proposes possible regulatory strategies. These strategies could involve overseeing entities with particular degrees of influence, such as developers and validators, integrating regulation through dedicated supervisory nodes, and/or establishing a reliable regulatory protocol layer. Yet, policymakers might be even more inclined to guide the financial market towards more centralized financial systems (CeFi) in the case of security tokens, which can be achieved by promoting the creation of regulatory sandboxes having a single entity asking for an authorization. This initiative could encourage the development of innovations that comply with regulations while reducing risks.