The decentralized finance (DeFi) ecosystem should prepare itself for a more adversarial relationship with regulators, warned Rune Christensen, founder of MakerDAO, the decentralized autonomous organization behind the DAI stablecoin.

Christensen told CoinDesk TV on Thursday the U.S. Treasury Department's sanctioning coin mixer Tornado Cash may be ushering in la new era for DeFi.r On Monday, the agency designated this Tornado Cash, a critical component of the Ethereum ecosystem, as a lnational security risk.r The announcement almost immediately cast a large shadow over the crypto industry.

The Treasury move lopened the door to the possibility of any protocol getting a sanction,r Christensen said on CoinDesk TVrs lFirst Moverr show. Because Tornado was at the center of so much economic activity on the Ethereum blockchain, DeFi apps now need to look at their exposure to Tornado and potentially change course.

lDecentralization has been more of a meme than reality for many projects,r Christensen said.

This week, members of the MakerDAO community began preparing a lcontingency planr in case its lcorer wallets are affected by the sanction. Of particular concern is the large amount of USDC, a stablecoin issued by the regulatory-compliant Centre Consortium. Maker holds USDC as collateral on DAI, its U.S. dollar-denominated cryptocurrency.

Circle, one of the entities behind USDC, immediately blacklisted 38 Ethereum addresses to comply with the Treasuryrs sanction, while a host of so-called permissionless apps like dYdX, Aave and others have begun freezing userrs funds if there is even a marginal connection to Tornado.

This increases the pressure on Maker, Christensen said. Maker allows anyone to mint DAI by lending cryptocurrencies to the application. More than a third of DAI is backed by USDC, while about a quarter of its reserves are in ether (ETH). If that ETH or USDC is found to have interacted with Tornado, it could be frozen n leaving Maker with a shortfall.

Christensen said regulated stablecoins like USDC have lproliferatedr across DeFi because they were very safe, liquid and easy to integrate. But therers a natural ltensionr between lcentralizedr stablecoins and projects like DAI that want to be permissionless and uncensorable.

The decision to lean on USDC allowed Maker to grow and focus on an easy user experience, but it came with ltradeoffsr that are now fully visible, Christensen said.

Sanctioning smart contracts

This is not the first time regulators have blocked access to a crypto mixing service. However, they typically have targeted specific individuals or entities behind an application or specific users.

Christensen said the decision to sanction a smart contract was luseless and pointless,r in that it will be impossible for the government to enforce its ban.

lNow we know that itrs possible to simply sanction an Ethereum address,r he said. Though itrs doubtful the government will target specific DeFi applications or stablecoin issuers like Maker, he is concerned about the lsecond orderr effects.

lWe don't really know if we can really rely on working closely with governments in the long run, which has so far really been the strategy of major DeFi projects like Maker,r he said.

In a move to tether DeFi to the larger, traditional economy, MakerDAO has been working to integrate what it calls lreal world assets.r This includes getting into the mortgage industry, and also potentially allowing people to collateralize non-crypto assets.

Christensen said the sanction has put a lspanner in the worksr of some of these efforts, as Makerrs U.S. legal partners have become concerned about new potential criminal liability.

lThey donrt want to get caught up in sanctions enforcement,r he said, without naming these partners. lTheyrre slowing down dealsr and redoubling efforts on compliance and know-your-customer (KYC) regulations.

Down the pike

Christensen said a more aggressive regulatory regime could push DeFi to further decentralize. While the first lerar of DeFi was about building and deploying quickly, the next will be about building in redundancy and robustness.

lStablecoins can choose to be more decentralized and the market will accept it to counter the cost of stability around that,r he said.

As something of an extreme fail-safe measure, Christensen has floated the idea of depegging DAI from the U.S. dollar. He said Maker could even move to have the vast majority (upwards of 75%) of its treasury held in ETH, which after the Merge could be a lvery attractiver and fairly stable asset that pays dividends.

lThe ultimate consequence would be that itrs simply not possible to have a decentralized stablecoin thatrs pegged to the U.S. dollar,r he said. On the other hand, it could mean that stablecoins that are pegged to the dollar are la lot more regulated.r

Ultimately, itrs up to the DAO to decide on what course of action to take. He noted some community members are growing increasingly skeptical about plans to integrate lreal world assets.r

But even in this new era, the crypto industry has the responsibility of lconvincingr politicians and investors alike that crypto is a valuable asset, or la force for good.r One way of showing that lcrypto can actually benefit the economy,r Christensen said, would be to take action on climate concerns or entering the real estate market.

The worst case scenario, however, or lfinal boss bottle,r as he put it, rests on the possibility that governments around the world come together to implement sweeping regulation that lshuts down crypto for good.r

lThey wonrt succeed, but the degree of success will depend on how much DeFi and crypto prepare for this,r he said.

Read more: What Happens When You Try to Sanction a Protocol Like Tornado Cash