The right to privacy is enshrined in many legal traditions around the world. In the United States, it’s protected by the Fourth Amendment; in the European Union, it falls under Article 8 of the European Convention for Human Rights. While definitions differ between jurisdictions, most of us have a right to a reasonable expectation of privacy for our correspondence, in our homes and about our persons.
In the 1970s, businesses, families and individuals started generating data like never before, and the degree to which it fell under existing privacy mandates was increasingly unclear. This proliferation of data was first acknowledged as a problem in the late 70s and picked up pace in the decade that followed. In response, the EU introduced its Data Protection Directive in 1995, guaranteeing certain fundamental rights around the processing of personal data.
The crucial thing to understand in this context is that an EU directive leaves space for member states to determine how it will be incorporated into national laws. It is a recommendation, not a regulation that would legally require members to enforce laws from a set date.
From 1995, the regulation of privacy in the EU trod a well-worn path. Starting as a directive, it eventually developed into the General Data Protection Regulation (GDPR), which became a lawful requirement in 2018.
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GDPR became the benchmark for privacy law and influenced regulation in other jurisdictions, including the United States. It’s a phenomenon Anu Bradford coined “The Brussels Effect,” where EU law sets the global regulatory standard. We’ve seen it happen in a number of fields besides data privacy, such as environmental law and online hate speech, which often enter the U.S. via a similar mechanism: the “California Effect,” whereby California sets a strict standard that is later widely adopted in the United States.
And now there’s another industry poised to follow this well-trodden path — from EU directive to EU regulation to global regulatory standard.
The case of Tornado Cash — which saw a protocol designed to mask financial transactions and increase privacy shut down by regulators because of its use by bad actors — is an example of why regulation is so vital to decentralized finance (DeFi). Infrastructure must be built along regulatory lines.
Like data in the 1980s, the proliferation of digital securities and the wider DeFi space is…
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