digital currency

Why Regulation Is So Important For The DeFi Industry?

Cryptocurrency Finance

Cryptocurrency is rising in popularity faster than ever — and so are the growing pains that come with it.

On the one hand, we can see clear cycles to the value of crypto technology, almost like seasons. It often starts with a period of disinterest followed by an eventual and sudden surge in the price of Bitcoin. Then there’s a period of popularity for alt-coin. When prices reach a new high point, people sell off in a panic.

On the other hand, there are also signs that digital currency and decentralized financial systems continue to grow in influence and usage every year, but especially in 2021. Major breakthroughs include the adoption of Bitcoin in El Salvador, increased interest and services from traditional institutions like Goldman Sachs and Visa, and skyrocketing spending on the nascent industry for NFTs, or non-fungible tokens.

The result is that these revolutionary new financial technologies are increasingly at odds with traditional banks and regulations.

Regulation of crypto technology has been essentially absent for the first 10 years or so, and now Western regulators are woefully far behind.

lending crypto tokens

That’s even more relevant for DeFi protocols, which are used mostly for trading and lending crypto tokens and derivatives. Unlike crypto exchanges like Coinbase, which are typically managed as a single legal entity. DeFi protocols must use a maze of different portals.

This difference makes them more challenging for regulators because many DeFi systems lack any requirement for users to identify themselves.

Amine Larhrib believe one of the most crucial changes for DeFi businesses moving forward will be creating the KYC (know your customer) processes that already exist for cryptocurrency exchanges.

Western regulators have eyed the cryptocurrency sector with great suspicion. This is due to two factors:

  • Early adopters of crypto technology were particularly libertarian and thought the initial anonymity it conferred would mean they didn’t have to pay taxes.
  • Much of the volume of initial cryptocurrency use was for money laundering or purchasing illegal goods.

A prime example of this occurred in November 2020, when the US government seized the assets of Silk Road, a former online black market best known for selling drugs. The government took custody of 69,370 Bitcoin in that seizure, which at present value would amount to $4.1 billion.

For a little context, that’s more money than the GDP of the 32 least affluent nation-states in the world. So it shouldn’t be surprising that US regulators continue to look at crypto with suspicion.

“I think we really need to examine ways in which we can curtail [cryptocurrencies’] use and make sure that money laundering doesn’t occur through those channels,” United States Secretary of the Treasury Janet Yellen said about digital assets.

This situation is understandable, but it also shows why regulations are important. The longer that it takes for the West to create legal frameworks, the more likely that regulators will have to accept the pre-existing structures that have already been established. Without major restructuring, the business models will be essentially immovable.

And while the West drags its feet on when and how to implement these regulations, the competition for China increases every day. China sees the value of blockchain technology and has taken a very different approach to cryptocurrency as a result.

The country is developing its own digital currency and developing its ability to harness these new financial technologies. If the West wants to compete, then it needs to start taking the crypto and DeFi industries much more seriously.