Regulation of DeFi in Canada: Challenges and Prospects

Abstract

The emergence of Decentralized Finance (DeFi) has brought about transformative changes in the financial landscape, challenging traditional regulatory frameworks. This thesis provides a comprehensive exploration of the regulatory complexities and challenges surrounding DeFi in Canada, highlighting its growth and significance. It begins by exploring the evolution and disruptive potential of DeFi, particularly its capacity to reshape traditional financial paradigms. A historical context of financial regulation highlights its limitations in managing DeFi's decentralized nature. The study also outlines the rapid growth of DeFi and explains the foundational technologies of Blockchain and Distributed Ledger Technology (DLT), which drive DeFi innovations. Key components of DeFi, such as Bitcoin, cryptocurrencies, and Smart Contracts, are examined for their significance and regulatory complexities. The interplay between Smart Contracts and existing regulatory frameworks reveals the challenges faced by regulators. Additionally, the study scrutinizes the current Fintech and financial regulations, illustrating their inadequacy in addressing the decentralized aspects of DeFi. A detailed overview of Canadian law assesses the existing regulatory framework’s relevance to DeFi, including tax treatment of virtual assets and regulations for Stablecoins and Decentralized Exchanges. The thesis also explores the prevalence of DeFi-related fraud and suggests strategies to protect investors. Consumer protection measures, such as disclosure, transparency, privacy, and cybersecurity, are discussed to enhance trust and mitigate risks. Environmental concerns related to token mining and issuance are also considered, with an emphasis on sustainability. The thesis ultimately provides insights into the regulatory challenges of DeFi in Canada, offering recommendations for policymakers, regulators, and market participants navigating this rapidly evolving space.