Opinion by Hong Yea, Co-Founder and CEO of GRVT.
In some instances, opinions expressed by crypto experts regarding regulation and compliance within the Decentralized Finance (DeFi) sector can be quite contrasting. During formal gatherings like conferences or informal side events, I’ve encountered peers and rivals expressing views that DeFi operates under its own self-regulation and no longer requires external regulation. This belief is grounded in the fact that the logic behind DeFi is inherently encoded within the blockchain.
The logic, however, ends right there.
There’s no room for human error
The most critical piece of information being overlooked is that humans set the logic, write the code and assemble the smart contracts. Most of us are willing to admit that we are prone to behavioral biases, whether conscious or not. Others are less willing to acknowledge that they carry some form of malicious or mischievous intent. Whether people confess or not is irrelevant. The proof is in the countless harmful actions DeFi has already witnessed.
In a decentralized financial (DeFi) world that often lacks proper regulations, the flaws rooted in human-centric decision-making, the cyclical and elusive nature of security loopholes, and the occasional unawareness among traders can create issues. Emulating the lawless Wild West is not beneficial for the majority as it can lead to exploitation and instability. Therefore, adherence to compliance in DeFi is crucial.
Trust is key to unlocking institutional investment
In simpler terms, one key aspect that’s lacking in Decentralized Finance (DeFi) is a strong sense of trust. Even those creating trustless DeFi products might admit that, in the end, a system without trust isn’t fully reliable. While there is some trust present now, it could be more robust. Effective and stringent compliance measures are what’s currently missing to strengthen this trust.
The pattern is evident: DeFi creators require investments, investors and users require trust, and institutions demand compliance (which is true for traditional finance as well). Institutional funds flow in only when there’s compliance, enabling builders to secure their funding, and investors and users to gain trust. Platforms that refuse to comply may risk their credibility, but that’s a concern for another time.
From my perspective as an analyst, it’s challenging to dispute the value of a commitment to decentralization. However, it seems there’s a divergence in visions for the future, particularly among those who envision DeFi and TradFi (or CeFi) as separate entities. To me, DeFi appears as a necessary and beneficial technological advancement that addresses many of TradFi’s fundamental issues such as high cost, slow processing, centralization, exclusivity, and corruption.
A design focused on solutions within DeFi might steer us towards an ideal system, but the greater potential for human error reduces our chances of achieving that rare outcome. In other words, even the most innovative form of decentralization doesn’t replace the need for regulation – let’s avoid any misconceptions about this matter.
Recent: Blockchain testnet launch brings Web3 applications closer to Web2 standards
The transition toward compliance is a good thing
Regulation is the culmination of decades of careful adjustments, millions of hours of education and professional experience, and the scrutiny and nitpicking of countless experts. Regulation prevents incorrect and potentially harmful logic from being mistakenly (or maliciously) implemented into the system. That level of precision is necessary when trillions of dollars are at stake, and the industry’s future hangs in the balance.
In different parts of the world, lawmakers have prohibited cryptocurrencies due to its lack of regulation, while some other nations are contemplating similar actions. Yet, it’s essential to acknowledge that there’s another perspective: countries such as the United States seem to be making significant efforts to legalize cryptocurrency. Boosting the industry’s credibility is the quickest and most effective method to prevent bans in even more countries and regions.
Beyond the financial investments people are making in markets to expand their wealth, there’s now a vast number of professionals who work within this field and rely on its prosperity for their income. It’s crucial that we strive for a more reliable sector for everyone’s sake. Given Bitcoin‘s enigmatic, rebellious, and counter-cultural beginnings, it’s high time we adapt to the present to transform DeFi into the truly inclusive powerhouse it has the potential to be.
The next step
Although these words offer support, it’s crucial to remain keenly mindful of the hurdles we may encounter on our journey. These aren’t merely emotional barriers set by opponents, but also the tangible resistance that arises when attempting to implement forward-thinking modifications.
To establish a decentralized finance (DeFi) world that complies with regulations, it’s crucial to first verify that any logic used within this sphere meets or even exceeds regulatory standards. In this way, just as many crypto pioneers view their technology as superior to traditional finance (TradFi), DeFi can challenge the existing regulatory system and pave a more advanced route ahead.
Hong Yea is co-founder and CEO of GRVT. After a decade as a trader at Credit Suisse and Goldman Sachs, he co-founded GRVT in May 2022. GRVT aims to transform financial markets by integrating blockchain technology and self-custody solutions, focusing on blockchain settlement and trustless risk management. Hong’s international upbringing and business studies at Yonsei University shape his strategic vision for GRVT’s mission.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of CryptoMoon.
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2024-11-15 11:09