Over the last couple of years, blockchain technology and the DeFi applications that it supports have spread far and wide.
From collateralized lending to yield farming, liquidity pools to fractional ownerships via NFTs (non-fungible tokens), the DeFi ecosystem offers way better returns than traditional finance (TradFi).
The expansion of the DeFi sector has been so rapid that most governments and regulators worldwide found themselves unprepared.
Until recently, financial regulators have primarily been trying to catch up to the evolving technology.
Ever since the US SEC issued its investigative report on “The DAO” in 2017, concluding that “investment contracts” offered via DAOs or self-executing smart contracts should be treated similarly to traditional financial instruments, progress towards a more permanent DeFi framework has been limited.
Enter, Caroline A. Crenshaw, Commissioner of the United States Securities & Exchanges Commission (SEC). Through her latest opinion piece, “DeFi Risks, Regulations, and Opportunities,” the SEC Commissioner urged decentralized finance (DeFi) participants to comply with all applicable securities law regulations voluntarily.
Acknowledging the ongoing uncertainty surrounding the new regulatory framework for DeFi, Crenshaw reaffirmed SEC’s previous announcements, highlighting that “old and existing” laws that apply to securities can and will be applied to blockchain-based financial products and solutions.
The SEC Commissioner also touted dApps (decentralized apps) and DeFi protocols, calling them a “disruptive and beneficial financial innovation” while pointing out the transparency problems in DeFi due to on-chain pseudonymity.
The article goes on to clarify that within the US, multiple federal authorities, including the Financial Crimes Enforcement Network (FinCEN), the Commodity Futures Trading Commission (CFTC), the Internal Revenue Service (IRS), the Department of Justice (DoJ), and the SEC, can exert jurisdiction over different aspects of the DeFi ecosystem.
Commenting on the problems of on-chain pseudonymity as pointed out in the article, JD Gagnon, CEO of BENQI, notes, “It’s a really tough one, but I do generally agree that some form of market gatekeeping to protect less educated individuals might be a good thing.
It’s probably why we’re seeing a strong push to get all Centralized Exchanges to perform strict KYC checks as most of these exchanges are usually fiat off-ramps for exploits or hacks.”
He continues, “But it should also be noted that overregulation may potentially hurt innovation, which has been a key driver for growth in most countries. It’ll be interesting to see how pseudonymity is handled as most honest pseudonymous individuals choose to go that direction because of regulatory implications towards them for being involved in crypto/DeFi.”
With the SEC Commissioner urging DeFi participants to collaborate with regulators and help come up with a more refined regulatory framework that works for all.
Let’s take a closer look at some blockchain projects that offer better security within DeFi while ensuring compliance with regulatory policies.
Founded in 2018, Alkemi Network bridges centralized finance (CeFi) to decentralized finance (DeFi). The platform has developed an institutional-grade liquidity solution for financial institutions and investors, allowing them to access “professional” DeFi and earn yields on a range of Ethereum-based assets.
Using Web3 technology, Alkemi removes the hurdles for CeFi institutions to enter the world of DeFi. Alkemi Earn (Earn), the platform’s KYC-permissioned digital asset pools, guarantees institutions with compliant access to participate in a trusted-counterparty environment of allow-listed users.
Alkemi Network also offers “institutional-grade” reporting, advanced risk management features, and multi-sig wallet functionality to support institutional adoption further.
With the SEC concerned about on-chain pseudonymity, Alkemi emerges as a possible solution that follows KYC and AML guidelines and ensures that CeFi institutions can seamlessly portal into the DeFi ecosystem. The platform has already made a name for itself, closing a $4.6 million funding round with over $32 million TVL (total value locked) in its network.
Alkemi Network is working together with a consortium of industry leaders, including Shift Markets, LedgerPrime, JST Capital, Autonomy Capital, Validation Capital, Kronos Research, and many more.
With the total value locked (TVL) in DeFi inching closer to $300 billion, there has been an increasing number of targeted cyberattacks on several DeFi platforms. As such, the need for robust security solutions is at its peak.
While several promising Web3 projects aim to secure the DeFi ecosystem, Prosegur Crypto, the digital asset custody solution of Prosegur group, has introduced an end-to-end security solution for the safekeeping of digital assets, especially for institutions.
Prosegur is one of the most prominent names within the International Security industry.
The platform has operated for more than four decades across 26+ countries, managing upwards of $400 billion in assets in the traditional financial (TradFi) world.
Owing to the legacy of Prosegur, its latest crypto-security product, Crypto Bunker, is said to be the most secure and advanced crypto asset custody solution for the institutional market.
By design, the Crypto Bunker offers a multi-layered asset protection model based on the 360-degree inaccessibility concept.
This means that Prosegur has implemented more than a hundred security measures in six integrated security layers while considering all possible risks revolving around the custody chain.
Crypto Bunker makes use of two unreachable environments, with the custody mechanism’s core being completely offline storage.
At the same time, it uses an air-gapped HSM (Hardware Security Module) to store the private keys. Furthermore, the platform ensures no single point of failure by using a secure multiparty computation (MPC).
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