Journal Article
The authors examine which decentralized finance architectures enable meaningful regulation by combining financial and computational theory. They show via deduction that a decentralized and permissionless Turing-complete system cannot provably comply with regulations concerning anti-money laundering, know-your-client obligations, some securities restrictions and forms of exchange control. Any system that claims to follow regulations must choose either a form of permission or a less-than-Turing-complete update facility. Compliant decentralized systems can be constructed only by compromising on the richness of permissible changes. Regulatory authorities must accept new tradeoffs that limit their enforcement powers if they want to approve permissionless platforms formally. The authors analysis demonstrates that the fundamental constraints of computation theory have direct implications for financial regulation. By mapping regulatory requirements onto computational models, they characterize which types of automated compliance are achievable and which are provably impossible. This framework allows us to move beyond traditional debates about regulatory effectiveness to establish concrete boundaries for automated enforcement.
Faculty
Associate Professor of Finance
