Several former US government officials have been joining crypto companies lately, raising concerns of crypto institutionalisation undermining the idea of decentralised finance (DeFi). Compliance aspect of the wider crypto adoption could either change the course towards industry growth and adoption or split it into two different directions.
The recent Coinbase IPO listing has become a watershed moment for cryptocurrencies and their move towards the mainstream. The broader acceptance has been further affirmed as crypto companies continue hiring a number of former US government officials, most recently—a former top US banking regulator joined Binance, at the beginning of May. While it could help crypto companies handle emerging US regulatory frameworks, it also raises questions if cryptocurrency institutionalisation undermines the ideology of decentralised finance (DeFi).
Bitcoin especially has seen massive endorsements from well-known financial leaders this year, driving the huge institutional interest. Major companies like Tesla and Square have been heavily investing in Bitcoin, financial giants Visa, Mastercard and PayPal began implementing crypto within their services—all helping to boost Bitcoin’s credibility.
While around 60% of crypto owners in the US would use their bank to invest in cryptocurrencies, according to a recent survey, the crypto institutionalisation would come with a number of regulatory frameworks for digital assets and their trading. The regulations and the wider use of Bitcoin, in turn, bring uneasiness of losing the core idea of blockchain technology—decentralised and peer-to-peer based.
However, Vytautas Zabulis, CEO of H-Finance —a regulatory-compliant digital asset trading solutions company—notes that while for some ‘true believers’ in blockchain technology and DeFi movement the regulatory compliance might seem uncalled for, the regulation would remove speculative use of blockchain-based currency, legitimising the technology for broader use, which would continue to have room for DeFi innovation, with more credibility to support its growth. That said, current regulatory frameworks would not work for digital asset classes and would require a unique approach for broad application.
“It’s impossible for digital assets to go mainstream without clear regulation and sufficient safeguard,” explains Zabulis. “As Bitcoin becomes an institutional asset, market participants expect regulation to be in place to protect capital and have clearly set rules. As cryptocurrencies start being treated as a new asset class at least some clear rules will need to be put in place to solidify international adoption.”
Die-hard crypto fans?
Zabulis notes that it is an extremely complex situation, since most people begin using crypto because they see it as a financial speculative asset, not because they are die-hard fans of the technology itself. In turn, because the main use of digital assets at the moment is frequently speculative, regulation is key to, at least, set minimum standards to market participants.
This does not mean that regulation should be overwhelming to stifle the organic growth of the crypto industry. As an example of subtle regulatory adoption, the Markets in Crypto Assets (MiCA) directive in the European Union, would set clear rules of the crypto assets throughout the EEA without the need for further national legislation, establishing a common framework and avoiding anomalies resulting from personal interpretations. In contrast, in the US crypto companies are seen as money service businesses and fall under Financial Crimes Enforcement Network (FinCEN), in addition to other regulatory requirements, which is still in debate of being a right approach to digital assets regulation.
“It is a big step forward to make the assets more usable and stable,” adds Zabulis. “First of all, banks will be able to work with a compliant crypto sector—something that currently is more of an exception than a rule. But we need to be honest and acknowledge that a fully regulated crypto sector will lose its charm and I would not be surprised that a new type of ‘Bitcoin’ or technology will emerge; some are already looking into in-game asset regulation.”
Cases of NFT and DeFi illustrate that parts of the industry might not need regulation as they can function independently. These two use cases show that crypto assets could be used not only as speculation but mainly for the purpose of the technology—to make finance more decentralised and increase financial inclusion, such as NFTs changing how we interact with art and intellectual property.
While the opinions on complacent crypto are diverging, the broader acceptance of digital assets is in full swing with major endorsements from financial leaders and visible moves towards regulatory compliance. The regulations both in the EU and the US would help crypto companies to work within set frameworks if digital assets continue to seek going mainstream.