Behavioral Finance and Public Policy Insights on Financial Market Regulation
Decentralized finance (DeFi) is a form of finance without central financial intermediaries. This handbook explores the interplay of behavioral finance and public policy in the emerging field of decentralized finance. This work
- explains the underlying mechanisms in a nutshell from a social science, economics and legal perspective;
- investigates DeFi's potential impact on financial systems and the risks involved, including smart contract vulnerabilities and trust mechanisms;
- provides insights into financial decision-making processes in DeFi; and
- offers suggestions to enhance regulatory frameworks.
The advent of decentralized finance (DeFi) has engendered a myriad of novel challenges and prospects for investors, intermediaries, and regulatory bodies alike. To navigate this complex landscape, it is imperative to understand the intricate interplay between behavioral finance and public policy, enabling the development of efficacious regulatory strategies that tackle these challenges while harnessing and capitalizing on the advantages and benefits offered by DeFi. This conceptual literature review investigates DeFi's transformative potential within financial systems and the associated risks, encompassing smart contract vulnerabilities, dependencies on other protocols, decentralization shams and trust mechanisms. By dissecting the complexities at the intersection of behavioral finance and public policy, this study delves into the decision-making processes in financial markets and regulatory public policymaking, particularly within the context of DeFi. Subsequently, recommendations for refining regulatory frameworks and practices to facilitate a more robust and adaptive financial ecosystem are proposed, taking findings from behavioral finance into account. In short, the answer to regulating DeFi, may be found in regulating peers (on- and off-ramping services) based on their offered services (if any), making them responsible for compliance with financial market regulation, trade law, tax law, and other provisions as applicable.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
