Decentralised finance removes the reliance on a third-party — such as a bank — when conducting transactions.
Bitcoin was founded on this idea in light of the 2008 financial crisis, to help consumers transact without having to give up custody of their funds. Unfortunately, self-custody comes with a number of drawbacks too.
For starters, a lack of convenience — if there are flaws in a decentralised protocol, there’s no customer service to turn to and no company to hold accountable. Self-custody might provide complete ownership but that also comes with complete responsibility.
Users have to keep track of all the details — from transfer amounts to wallet addresses — because once a transaction is complete, it’s irreversible. Millions of dollars worth of crypto has been lost simply due to typos.
In December last year, NFT trader maxnaut accidentally listed his Bored Ape Yacht Club (BAYC) NFT for 0.75ETH (US$3,000) instead of its going rate of 75ETH (US$300,000). It was immediately bought, and he had no way to seek further compensation.
DeFi comes with security risks as well. Hackers have exploited smart contracts to steal large sums of money in recent years. In March, over US$625 million was stolen from the Ronin Network as the result of one such hack.
Pivoting away from decentralisation
Considering such factors, the idea of decentralisation has taken a back seat in recent years. With global regulations shaping up and institutional money flowing in, centralised crypto companies have played a key role in driving user adoption.
At the time of writing this, the top 100 decentralised exchanges recorded US$5.1 billion in 24-hour trading volume, as per CoinGecko. To put it in perspective, Binance alone recorded almost triple that volume in the same time frame.
Oliver Linch, CEO of crypto exchange Bittrex Global, remarks that this is the natural course of evolution for blockchain technology. “It would be absurd to think that the stated goals of a few enthusiasts at the very birth of crypto would continue to be directly relevant a decade or more later, given the fast pace of change,” he says.
Linch comments on the use of decentralisation to stay anonymous and dodge regulations, calling it a ‘nightmare’ for people actually interested in blockchain and the power of crypto. As it turns out, there are more effective ways to reshape the world of finance.
The principles behind crypto haven’t changed. Satoshi Nakamoto’s goal of creating a more trustworthy financial system is clearly possible, but it’s fundamental that this outcome be achieved with clear, coherent regulation and transparency.
– Oliver Linch, CEO of Bittrex Global
With each crypto winter, the need for regulation has become increasingly apparent. For crypto to go mainstream, safeguards and protections are a must.
“Clear laws will increase the adoption of crypto, as aspiring adopters will feel safer investing their money into regulated institutions,” Linch explains.
Apart from consumers, regulations stand to benefit crypto exchanges as well. Although they may face increased compliance costs, increased investor confidence could help them appeal to a wider target audience.
The growth of crypto regulations
For the past few years, anti-money-laundering (AML) and counter-terrorism-financing (CFT) have been the two primary concerns of regulators looking into crypto. However, with the space evolving rapidly, the need for more nuanced policies has become apparent.
“The most effective regulatory regimes are those that engage much more deeply with crypto than mere AML/CFT supervision. Not only do we need robust KYC requirements, tailored to the crypto space, but we need to establish regulatory frameworks around crypto itself,” says Linch.
In Singapore, the latter might soon come to fruition as the MAS takes a closer look at stablecoins. Crypto exchanges are already being regulated under the Payment Services Act, with more measures soon to be put in place. These could include restrictions on retail access and standards for cybersecurity and asset management.
Linch believes that crypto exchanges can be regulated using the same principles which are used to regulate traditional finance markets.
“We have for many years had a pretty clear understanding – with relatively little divergence on the international level – of what is meant to regulate a traditional exchange. With the introduction of the Markets in Crypto-Assets (MiCA) bill [in Europe], perhaps expectations can be set similarly for crypto exchanges.”
Given the globalised nature of finance today, there is a strong need for consistency and agreement between countries when it comes to regulating crypto.
Crypto’s impact on the world of finance
While early believers might have seen crypto as a successor to traditional finance, this line of thought isn’t as common anymore. Instead, a convergence seems to be on the books.
“I believe that soon enough, there will no longer be a gap between traditional finance and the world of digital assets. Crypto will [start to] play a role in our everyday financial lives.” says Linch.
From cross-border transfers to improved accessibility to financial products, crypto is broadening the world of finance in a number of different ways. It’s unclear which of these use-cases will survive the test of time, however, Linch believes crypto is here to stay one way or another.
“Pretty much everyone now agrees that it’s impossible to imagine a future without crypto,” he concludes.
Featured Image Credit: Money Control