Crypto billionaire Mike Novogratz says DeFi networks need to tighten their security before regulators come knocking

• Decentralized finance, or DeFi, networks should tighten their security, Mike Novogratz said.
• The crypto billionaire said regulators are increasingly focused on the space.
• DeFi aims to use blockchain technology to cut intermediaries out of finance.

Cryptocurrency billionaire Mike Novogratz has said decentralized finance, or DeFi, networks need to tighten their security and "play by the rules" if the industry is to thrive, and that regulators are increasingly focused on the space.

Novogratz on Wednesday tweeted some advice for DeFi networks, saying: "Invest in a compliance layer now or pay the piper later."

The chief executive of crypto investment firm Galaxy Digital said he was "hearing a growing chorus that officials are focused on [DeFi] with increased intensity."

He added: "If we want this ecosystem to grow we need to recognize we need to operate within the rules society sets."

Read more: Bank of America sees DeFi as potentially more disruptive than bitcoin. The bank breaks down why DeFi is a fundamental challenge to modern finance.

DeFi aims to use blockchain technology - which underpins cryptocurrencies - to cut banks, clearing houses and other intermediaries out of financial activities such as making loans and trading.

Major institutions such as French bank Societe Generale have begun working on DeFi projects, such as digital bonds. JPMorgan and UBS are among the banks to have invested in companies that work in the decentralized finance space.

Yet there are signs that regulators are taking notice of DeFi. A top A Commodity Futures Trading Commission official said earlier in June that he thinks much of the DeFi world is probably illegal and that regulators should pay more attention to the technology.

Novogratz suggested DeFi is at something of a crossroads. "Starting to think that major DeFi protocols are going to have to decide if they are going to play by the rules that most countries want them to (KYC/AML), or if they are going to flip the middle finger at them," he tweeted.

KYC means "know your customer" and AML means "anti-money laundering" - two key due-diligence areas of concern for regulators.

"Zero-knowledge compliance and other systems need to be developed for DeFi to scale. I am confident they will be," Novogratz said.