Following the collapse of cryptocurrency exchange giant FTX, governments are accelerating the process of getting cryptocurrency regulations in place. Many “cryptocurrency hubs” are reassessing how to harness the benefits of technology while actively mitigating risk. Notable examples of jurisdictions where regulators are stepping forward and making headlines include the US, European Union, UK, Hong Kong and Singapore.
But the race to regulate cryptos could actually be a problem, according to supranational regulators. The Financial Stability Board (FSB) and the International Monetary Fund (IMF) advocate for the creation of globally harmonized crypto regulatory standards before national authorities are bound by irreconcilable and disparate frameworks.
According to the FSB, the potential for overall consistency and comprehensiveness in crypto-asset regulation is expected to “strengthen international cooperation, coordination and information sharing.”“ To achieve this, the FSB advocates comparable regulation for digital assets and intermediaries that perform the same functions as their traditional financial (TradFi) counterparts.
Meanwhile, on the user side of the equation, investors are now prioritizing self-custody crypto wallets and moving to decentralized exchanges for greater transparency and control. ) is prompting national and supranational regulators to reconsider the benefits of decentralization, just as they have set out to coordinate global regulatory approaches to cryptocurrencies.
Disadvantages of centralized finance
As the FTX debacle revealed, the shortcomings and shortcomings of centralized exchanges (CEX) reflect the particular opaque nature of TradFi, where behind-the-scenes activities are taken for granted. . In addition to the lack of transparency associated with balance sheets and customer assets, centralized financial organizations keep systems and records off-chain.
DeFi, on the other hand, offers permissionless financial products that offer greater transparency regarding client funds and non-custodial wallets. In short, the undetected misuse of user funds seen in FTX could never happen in DeFi. Make it possible. For example, there is currently a significant increase in efforts to improve the DeFi user experience and user interface (UX/UI) design. Especially since a simple and user-friendly interface is the main advantage of most centralized exchanges.
Prompted by the FTX scandal and the resulting surge in interest in DeFi platforms, regulators and TradFi agencies are taking a closer look at DeFi. Our team at SynFutures recently discussed the relative merits of DeFi with the IMF, suggesting that decentralization is a viable alternative to TradFi, including on-chain transparency and non-custodial and trustless solutions. emphasized the advantages of
As pointed out to the IMF, DeFi is more than a single asset class for cryptocurrencies. DeFi’s goal is to democratize access to all kinds of investment products and services. At a time when market trust has been usurped by intermediaries and distracted by a powerful marketing front, DeFi is reviving the true backbone of operations: solid code and permissionless systems.
DeFi could improve TradFi
Its open-source nature allows DeFi to iterate and innovate quickly, improving the existing TradFi infrastructure at breakneck speed. However, the uncertainty surrounding DeFi is hindering its mass adoption.
First, the unauthorized nature can be exploited by malicious actors, enabling money laundering and illicit fundraising. Second, the lack of clear regulatory guidelines also means that customers are easy targets for Ponzi schemes and other fraudulent practices. Third, Smarthis contracts can be subject to abuse and hacking, especially if unaudited.
DeFi wants to differentiate itself from TradFi, but it is imperative for DeFi to build and implement existing security measures prevalent within TradFi, such as risk management, financial controls, and regulatory frameworks. Mass adoption of DeFi hinges on accountability and consumer protection in the same way that TradFi globally has relied on regulatory and self-regulatory practices for functional stability. Going forward, public trust in the industry will depend on government regulation and trusted blockchain applications.
My guess is that efforts to establish a global crypto framework will likely begin by replicating TradFi’s actions. This next step in establishing a pattern of positive cryptocurrency regulation demonstrates the global community’s ongoing efforts to provide a clear framework for crypto services. Borrowing modes of governance from the already familiar TradFi network could also have broader implications for how governments implement regulatory actions.This requires the work of all parties within the crypto industry as well as within national and supranational regulatory bodies. togetherensuring that rules do not restrict innovation, supporting and protecting both consumers and businesses across borders.