CeFi and DeFi in the face of regulation

https://techcrunch.com/2023/04/13/cefi-and-defi-in-the-face-of-regulation/

Ira Lam
Contributor
Ira Lam is chief legal officer at SuperLayer, a web3 venture studio for launching new multi-chain, tokenized consumer products.

The full magnitude of the impact of the current market volatility in the wake of the collapse of FTX is still unknown. The dominoes keep falling and it is hard to predict how many more projects and organizations will end up being affected. What is undisputed is how the entire industry has been impacted and that the conversation about crypto regulation has risen to the forefront.

Calls for regulation have come from every corner: from U.S. Treasury Secretary Janet Yellen calling for “more effective oversight of cryptocurrency markets” and G20 leaders bringing up the need “to build public awareness of risks to strengthen regulatory outcomes and to support a level playing field, while harnessing the benefits of innovation.” U.S. Senators Warren, Smith, and Durbin have cited the dangers of “charismatic wunderkinds, opportunistic fraudsters, and self-proclaimed investment advisors” while urging Fidelity to scrap its 401(k) Bitcoin plan.

Notably, the SEC has taken a series of high-profile actions with respect to different projects — for example, against Kraken and its staking-as-a-service program, and Paxos in relation to the stablecoin, BUSD. The SEC also proposed an amendment to expand custody rules to include crypto assets, which could limit how any crypto custodian, including exchanges, could interact with crypto. This came in the wake of a joint warning issued to banks in January by the Federal Reserve, FDIC and OCC to be wary of digital asset firms, signaling that they were closely monitoring the crypto activities of banking organizations.

For the web3 ecosystem to scale, consumers need accessible ways to enter crypto. This means both DeFi and CeFi will have to evolve to meet the demand.

These actions are seen by many industry players as further indication that the SEC is doubling down on its attack against crypto and furthering its claim to jurisdiction over all aspects of the industry. While regulatory scrutiny has been focused on the crypto industry for some time, the magnitude of FTX’s downfall has created a climate in favor of crypto skeptics. Many are calling for a referendum against the entire industry, painting a picture of cryptocurrencies and blockchain as an industry dominated by self-serving, manipulative and reckless profiteers.

Most expect the worst: A reactive blanket crackdown on all aspects of crypto, framed as necessary to protect the public from future bad actors, seems imminent.

But there are some measured voices. One of those came from JPMorgan, which observed that “…all of the recent collapses in the crypto ecosystem have been from centralized players and not from decentralized protocols.” JPMorgan’s report reaffirms the long-term institutional optimism, “we see the establishment of a regulatory framework as the needed catalyst to massively ramp the institutional adoption of crypto.” The report emphasizes the distinction between DeFi and CeFi.

A similar sentiment was expressed by Jake Chervinsky, chief policy officer at the Blockchain Association. The “middle of the bell curve” take is that FTX will trigger harsh regulations for everything in crypto, DeFi included. I don’t think so. Policymakers will have to investigate every last detail about FTX, and they’ll finally be forced to see how different DeFi is from CeFi.

CeFi and DeFi in the face of regulation by Ram Iyer originally published on TechCrunch