Crypto Regulations Could Bring Institutions to DeFi

Written by: Mustafa Mulla

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Mustafa Mulla

Mustafa has been writing about Blockchain and crypto since many years. He has previous trading experience and has been working in the Fintech industry since 2017.

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Aug 18, 2021


Recent weeks have seen regulators take a jab at the crypto ecosystem, with calls to regulate this market.

The U.S is among the leading jurisdictions currently focused on imposing regulatory frameworks for the crypto market. 

According to U.S SEC chairman Gary Gensler, the current nature of the crypto market exposes investors to significant risks.

Speaking at an event in August, Gensler noted that the crypto market does not have enough investor protection when compared.

“Right now, we just don’t have enough investor protection in crypto … Frankly, at this time, it’s more like the Wild West,”

While some crypto stakeholders oppose these developments, others argue that regulation will attract compliant investors.

This will also include financial institutions such as banks, investment firms, and pension funds. 

An Opportunity to Access the DeFi Market 

For a long time, Decentralized Finance (DeFi) has operated free of any regulations. Retailers worldwide being able to access the financial services featured on the existing DeFi protocols.

However, the narrative seems to be changing as pressure increases. The Pressure is for the decentralized protocols to introduce KYC tools, amongst other compliance features. 

With KYC in the picture, Defi presents a massive opportunity for institutional investors.

This game-changing crypto niche revolutionizes finance by making services decentralized, but it is yet to accommodate traditional financial institutions.

As per the trends, institutions are only willing to leverage the opportunities in DeFi if innovators embrace a compliant approach. 

That said, DeFi projects are fast coming up with solutions to onboard the larger institutional market.

One of the players in this sector that focuses on bridging Centralized Finance (CeFi) to DeFi is the Alkemi Network.

This platform features an institution-grade liquidity network, offering CeFi institutions a professional avenue to invest in DeFi. 

Alkemi’s flagship product, ‘Alkemi Earn‘, is a lending and borrowing platform that allows institutions to access DeFi through its permission pool.

This particular pool features a KYC framework and compliant reporting systems to enable institutions to navigate the murky DeFi market. 

What is Alkemi Network? | Introduction to Bridging CeFi to DeFi

Combining the experience of CeFi and DeFi veterans at the helm, the Alkemi network has done a great job.

They managed to bring over 60 institutions into compliant DeFi, with deposits totaling over $33 million as of press time.

Notably, Alkemi Earn also features an open-source pool where anyone can access DeFi lending and borrowing without KYC verification. 

Decentralized KYC Crypto Exchanges 

The ongoing regulatory crackdown has affected centralized crypto exchanges, including the likes of Binance and FTX.

While Binance is still in the process of sorting its in-house compliance systems, FTX has made significant progress with the exchange.

This happened by recent signing of Shark’s Tank host Kevin O’Leary as its official spokesman. 

O’Leary, who was previously hesitant on gaining crypto exposure, noted that institutions face a significant compliance hurdle, limiting their potential to invest in crypto

“I am no different. I want to increase my crypto exposure but also serve my compliance mandates. When it comes to rapidly changing compliance and tax reporting requirements, the current cryptocurrency ecosystem is fraught with risks that I can not take.”

Given the current developments, what odds will decentralized exchanges (DEXs) be the next target? Luckily, things don’t have to be complicated for DeFi users as some emerging DEXs now feature KYC tools. 

On this front, we have DEXs such as Polkadex, a peer-to-peer crypto exchange built on the substrate framework.

The Polkadex crypto trading platform is designed to enable high liquidity with other features such as trading bots.

This platform’s cutting edge is its decentralized KYC option. 

Ideally, institutions looking to invest in compliant DeFi can leverage Polkadex to gain exposure across various crypto assets.

The exchange’s KYC option is based on a privacy-focused approach, with the verification data being stored in a client’s wallet instead of on-chain. With Polkadex, financial institutions can meet their DeFi investment needs while remaining compliant. 

Polka dex

Bridging to Define the Future 

As crypto becomes mainstream, there is a growing need to make the ecosystem compatible with traditional finance. Innovators from both worlds are already merging to make this vision a reality.

This can be seen in projects such as Alkemi Network.

It has attracted centralized financial institutions, including popular funds like Kronos Asset Management, JST Capital, and Ledger Prime. 

JST Capital co-founder and partner Scott Freeman is one of the CeFi thought leaders who have acknowledged the potential in bridging CeFi to DeFi, 

“Since we’ve been active in the DeFi space from the beginning, we appreciate the value proposition that DeFi provides, whilst also acknowledging the hurdles that exist for traditional institutional investors to enter.”

Following all these developments, it is evident that regulation is fundamental to the growth of DeFi ecosystems.

We will likely see more DeFi platforms featuring KYC tools and compliant reporting systems to lure traditional financial institutions. In addition, a compliant approach will protect the DeFi market from regulatory uncertainties.   

Closing Thoughts 

Cryptocurrencies have an enormous potential of changing the outlook of today’s financial markets.

While decentralization is a significant part of their value proposition, a compromise has to be struck for the crypto market to survive in the long run.

This compromise will involve adopting compliant ecosystems to bridge the gap between CeFi and DeFi. Should the integration happen successfully, more capital will likely flow into DeFi in the coming years. 

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Mustafa Mulla

Mustafa has been writing about Blockchain and crypto since many years. He has previous trading experience and has been working in the Fintech industry since 2017.

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