Decentralized exchanges (DEXs) have emerged as an important component of a broader crypto-business segment known as decentralized finance (DeFi) – an ecosystem where financial activities are carried out through smart contracts rather than intermediaries. On a decentralized exchange, rather than a centralized intermediary a smart contract or a protocol executes trades on behalf of customers.
The regulation of decentralized exchanges is necessary from the standpoint of consumer welfare as well as anti-money laundering concerns. These issues are more easily resolved in centralized exchanges, where there is an identifiable or real-world entity dealing with users. Decentralized exchanges on the other hand are designed to offer peer-to-peer trading services, where a smart contract rather than an entity facilitates transactions.
Understanding how to regulate decentralized exchanges and other DeFi services is important for decision-makers globally. In recent months, avenues have emerged towards the “regulability” of decentralized exchanges. This paper traces these pathways, to establish a starting point for regulators in India to approach the oversight of decentralized exchanges.
Attribution: Meghna Bal. Decentralized Exchanges: Regulatory Perspectives for India. April 2022, Esya Centre.
This report is part of a series published jointly with the Internet and Mobile Association of India (IAMAI) that seeks to inform the public on the different policy dimensions of crypto-assets in India and the implications of regulatory decision-making on Web 3.0, blockchain, crypto-assets, non-fungible tokens and the metaverse. With this series, we aim to create a credible and trusted knowledge repository on the Indian crypto-market.