A visual way to think about how financial systems should operate is to compare them to highways, according to Giancarlo. 🚗
“We don’t tell people before you get on the highway [that] you’ve got to give up where you live, what bank you use, your social security number at some toll booth and then get on the highway in case you do something wrong. People get on the highway freely and then their activity is monitored,” he said.
One of the main concerns with entity-based regulation, like how commercial banks operate, is that consumers need to give up copious amounts of personal data in case they partake in illegal activities. Giancarlo’s argument is that banks and other centralized counterparties should rely on activity-based regulation, where they would monitor for unusual behaviour and then seek to censure the activity and obtain identity. 🕵️
Regulators need to accept that the financial world is undergoing a digital transformation — with or without — their support. The idea of financial liberty is driving millions of people to embrace emerging technologies like decentralized finance (DeFi), which allows people to operate in an environment that doesn’t require permission to conduct financial transactions. Giancarlo said it would be wise if those monitoring for suspicious activity use the very same tools that support DeFi to their advantage.
“The same technologies that enable DeFi also allow regulators to move from entity-based regulation to activity-based regulation. Rather than simply deputizing entities to provide services to regulators, we can use an approach to quantitative data analysis based upon blockchain-based transactions to analyze transactions, look for bad activities and then attack the activities without needing to so much deputize all these entities,” he said.