The Risk and Rewards of DeFi
In the world of DeFi, there is an unspoken agreement of risk/reward. That is the price one pays for more privacy and freedom than legacy banks and traditional financial institutions offer. While some people will buy into projects that will ultimately cost them their investment, decentralized exchanges give people the freedom to invest without onerous limitations.
Which is how it should be. If people want to mortgage their house to buy a bag of Dogecoin, they can. If they want to play it safe and invest in established projects in secure exchanges, they can. If people lost their money because they didn’t DYOR on a new coin with a cute mascot, oh well. Crypto is the Wild West of finance, and only the fastest and smartest are meant to survive.
Crypto as a Hedge Against Fiat
This system has worked Since Satoshi Nakamoto started Bitcoin in 2009. As global instability and financial crises rage across the world, more people have turned to crypto as a hedge against their volatile FIAT. Americans earned 4.1 billion dollars in Bitcoin gains alone in 2020. The value of the crypto market as a whole grew 220% in the last year, reaching 2.43 trillion dollars in the first week of May of 2021. Naturally, with so much money leaving the governments’ pockets, Big Brother has finally set its eyes on the crypto market in earnest.
Crypto Regulation is Inevitable
With cryptocurrency in the spotlight and so many countries reacting strongly one way or another, it feels that heightened governance and regulation are inevitable. The US is in the process of bringing the hammer down on crypto in the Infrastructure Investment and Jobs Act (H.R. 3684) and the Digital Asset Market Structure and Investor Protection Act (H.R. 4741).
The controversial language in the Infrastructure Bill, according to Justin d'Anethan,
“is a new provision included in the US infrastructure bill to expand the tax code’s definition of a broker. Ultimately, this is done to make sure that players in the crypto industry like miners, brokers, lenders, etc, need to “Know Your Customer” their users. And then those users can be identified and taxed more efficiently.”
Crypto, the Infrastructure Bill, and the IRS
Our most productive branch of government, the IRS, has decided that crypto is no longer a “scam or a fad,” because money for “infrastructure” has to come from somewhere. The crypto world is perfect, because the government holds none of the risk and reaps all the rewards.
The Infrastructure bill strips crypto of the privacy and autonomy which draws so many to it. Developers, miners, stakers, and others do not have access to the information “brokers” do, which will lead to innovation packing its bags and heading for new waters.
The Digital Asset Market Structure and Investor Protection Act is even worse, because it pulls cryptocurrency and other digital assets into already existing financial regulations. In a traditional “I’m from the government, and I’m here to help” fashion, they are trying to save us from ourselves. By regulating an industry of which they have no understanding.
Governance also affects platforms in addition to investors. In a recent Cryptonized episode, Richard Byworth, CEO of Eqonex Group, said,
“Obviously, we've seen a number of issues in recent weeks and months where you've seen two brothers in South Africa run off with $3.6 billion of crypto, because there was no oversight around what they were doing, there was no governance around their key security, what they were doing, so the CEO or the CFO, or whatever their roles would just run off with the assets... In an organization that is different [than standard securities], and NASDAQ standards of governance, can't even touch on this.
So you have multiple eye checks on large transactions that are going out of the organization. And this is basic stuff. It's what happens in banks across the world, you make sure that, you know, large transactions are authorized by multiple people. And this is what we have. And it's a core requirement when you think about governance, and Sarbanes Oxley and the requirements that come with being a NASDAQ listed company.”
Firms like Eqonex, a NASDAQ listed exchange, pride themselves on the security they offer, which is perfect for institutional investors. Byworth also said,
“I think the great thing about crypto is there's this place for everybody in it. And you know, if you want to look after your own assets, you know, and secure your house against possible theft and people com[ing] into your house, that's absolutely fine. We've built a platform for people that are not comfortable with that sort of risk. And institutions cannot be comfortable with that sort of risk. They have a fiduciary responsibility to their investors, to make sure that they're using a secure, regulated and well governed custodian for their assets or platform for the trading of those assets.”
The beauty of Eqonex is that they cater to the needs of institutional investors without requiring sweeping regulation. If allowed to work, the free market provides what consumers need. Eqonex is filling the void needed by legacy banks and traditional financial institutions to invest securely in crypto “on the up and up.''
Blanket regulation that doesn’t allow for nuance will ultimately harm the market and development. Most regulating bodies either don’t understand crypto or have a vested interest in maintaining the status quo, which compromises the message of DeFi.
A few clearly defined guidelines could also streamline the process of innovation and reduce FUD. The problem is finding the sweet spot that allows crypto the freedom desired with enough regulation to protect investors, developers, miners, exchanges, and etc.
Governance in Crypto
The topic of governance in crypto is very divisive. How do we protect buyers and investors without stripping the underlying value of DeFi? Do we even need protection in the first place? In an increasingly polarized conversation, nuance is being lost. Mark Twain said it best:
“The only two certainties in life are death and taxes.”
Governance is inevitable because taxes are inevitable, but it must be done right. DeFi is exploding, and there is no limit to where it can go. The big question is: will the government ruin the DeFi movement? Will Big Brother shut down the innovation to save FIAT, or will the people finally prevail?