DeFi — the ‘Wild West’ of crypto — is set to face regulatory

The fast-growing decentralized finance industry could be about to get a rude awakening.

Decentralized finance, or “DeFi” as it’s commonly referred to, is a trend in cryptocurrencies that first started gaining traction in 2020.

It’s been called the “Wild West” of crypto — hoards of computer programmers trying to bring traditional financial products such as loans to the blockchain.

The idea sounds promising. In theory, anyone could lend and borrow digital money at competitive interest rates, with no middle men involved. Investors are lured by the promise of earning up to double-digit percentage yields on savings in certain digital tokens.

But with major hacks and scams plaguing the space this year, regulators are becoming increasingly worried about the risk of crime as well as harm to consumers.

“I think they’re going to pay more attention to the space,” Sid Powell, co-founder of DeFi lending platform Maple Finance, told CNBC.

Almost $90 billion has been deposited into Ethereum-based DeFi protocols so far, according to data from The Block.

“It’s probably inconceivable that you have meaningful growth of DeFi which does not need to complement existing regulation in future,” Powell said.

Regulators have already started taking a tougher approach to the crypto industry.

Various countries have attempted to boot out Binance, the world’s largest digital currency exchange, for operating without their authorization. Since it has no official headquarters, Binance has so far managed to avoid scrutiny — though the company says it now wants to be a friend, not foe, to regulators.

Meanwhile, Coinbase in September got into a heated war of words with the U.S. Securities and Exchange Commission over a planned interest-earning savings product, which the regulator felt looked too much like a security. Coinbase later dropped plans to launch the feature.

And just this week, a long-awaited report from the U.S. government called on Congress to introduce regulation for stablecoins, digital assets pegged to traditional currencies like the dollar to maintain a stable value.

Now, DeFi appears to be next in line.

Earlier this year, the Wall Street Journal reported that the U.S. Securities Exchange Commission was probing decentralized crypto exchange Uniswap, with officials seeking information on how investors use the platform and the way in which it is marketed.

In September, acting U.S. Comptroller of the Currency Michael Hsu likened DeFi activity to controversial practices in Wall Street that led up to the 2008 financial crisis.

“One of the biggest questions facing regulators at the moment is how to deal with DeFi,” David Carlisle, director of policy and regulatory affairs at crypto analytics firm Elliptic, told CNBC.

“How do you apply regulatory standards designed for centralized intermediaries to the world of a few marketplaces where there’s no clear centralization?”

Carlisle said one source of concern for regulators is DeFi services…