After an eventful 2022 for the crypto space, many investors are now wondering what the future holds. Earlier this year, the Terra ecosystem crash course sent space into a downward spiral, sinking millions of investor funds in just a few days. Most recently, one of the largest centralized exchanges, FTX, filed for bankruptcy and also withdrew millions of dollars in customer assets.
Such catastrophic events have caused many crypto investors to seek protection and safety in the form of regulation. The crypto space is notoriously unregulated, but investors are suffering the consequences with losses of unprecedented proportions. Because of this, the DeFi space will cease to exist in its current form as more and more people and governments turn to regulatory frameworks as their salvation.
Why regulation is needed in crypto
Security concerns have plagued the cryptocurrency sector since its rise more than a decade ago. While blockchain represents a crucial step forward in terms of technological advances, it has also proven to be a breeding ground for new types of exploits and hacks.
From the draining of Mount Gox back in 2011 to the recent FTX hack and subsequent bankruptcy, the crypto space has long suffered from malicious exploits. To date, billions of client and institutional funds have been drained while regulation is still scarce.
Some members of the crypto community argue that regulation will contradict the original purpose of blockchain and cryptocurrency as a decentralized financial system. However, the need for compliance and some form of monitoring is evident. Without an approved standard of conduct and a regulatory framework for business transparency, decentralized finance will not be able to become a globally accepted financial system.
DeFi under threat
In the early days, decentralized finance, or DeFi, promised investors a self-sustaining market in which intermediaries were virtually eliminated. With control and responsibility placed in the hands of decentralized node operators, everything should run smoothly without the oversight of a central institution.
And to a certain extent, the DeFi sector has managed to achieve this. Cryptocurrency and decentralized finance opened up investment opportunities previously unavailable to the general population. Unlike the stock market, crypto is for everyone, and DeFi successfully reflects that.
Unfortunately, they all include hackers and malicious actors. DeFi smart contract exploits, scams, private wallet exploits and many illegal activities are still plaguing the space. This lack of security may lead to DeFi’s downfall in its current form. Investors are increasingly looking for ways to protect their assets and currently the crypto space is still struggling to provide that.
Throw the baby out with the bath water
While the quest for a regulatory revolution in crypto is in full swing, space and the community have a tough task ahead of them. Security needs to be improved, but not at the expense of DeFi’s underlying principles.
There is a real danger that regulation will hamper and impede what DeFi set out to achieve from the start – creating a free and accessible financial system for all worldwide. Decentralization must remain at the heart of the crypto space and all of the financial products it offers. Regulation will be beneficial to DeFi as long as it is carefully implemented and does not eliminate the good aspects of this financial system along with the bad.
The right compliance
One important element that DeFi needs to develop in order to live up to community expectations is compliance. From today’s perspective, DeFi platforms and products often overlook important aspects of their operational and security mechanics due to a lack of consistent standards and compliance guidelines.
If DeFi is to survive and solidify as a viable financial system, compliance standards should be put in place. There are already many companies trying to improve the accuracy and transparency of blockchain-based services, but adoption is not yet widespread.
Of course, it is important to strike the balance between regulatory measures and compliance requirements and the freedom and decentralization that are at the heart of DeFi. Creating a secure environment for DeFi projects and their clients is what the next generation of products in this space will strive for. And adhering to a consistent standard across the blockchain ecosystem will help achieve that goal.
DeFi is here to stay as a revolutionary, global financial system. However, the space needs to grow and evolve to meet the needs of its users. With some profound lessons learned from recent events and a strong push for change from the community, the DeFi space has a tough road ahead.
Coinfirm CEO Dr. Mircea Mihaescu, has more than 30 years of experience in technology and financial services, blue chips and startups; Positions include COO, CTO and VP of Engineering. Co-founder of OwlRidge Capital, COO of US challenge bank Moven. Founder of SBT Venture Capital.
Coinfirm CEO Dr. Mircea Mihaescu, has more than 30 years of experience in technology and financial services, blue chips and startups; Positions include COO, CTO and VP of Engineering. Co-founder of OwlRidge Capital, COO of US challenge bank Moven. Founder of SBT Venture Capital.
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