Compliance Should Be The Starting Point For Crypto Platforms; Not Something You Do “Later”

There’s a prominent issue in the DeFi space that I continue to find alarming, and yet despite the solution being obvious, in many cases it continues to be ignored. I’m talking about licensing and compliance, and how crypto platforms, DeFi protocols, and all sorts of blockchain apps are failing to pursue compliance from day one. Instead, they’re opting to become compliant at some point in the future, once they’ve scaled. This is a mistake.

The Goldman Sachs, Merrill Lynchs, and BlackRocks of the future will be built on the blockchain, I’m almost certain of that. The administrative and economic benefits of decentralization allow for improved resource allocation, greater autonomy and transparency, and overall better accountability. For those reasons, and countless others, the world’s biggest companies will either be decentralized, or harnessing the technology in new ways. Unfortunately, despite all the advantages, decentralization simply doesn’t fully compensate for regulation, in fact, many people and projects misuse the tech to avoid compliance and evade detection.

If I’m right, the companies that will eventually rise to the top of the new financial order will be those that were strictly compliant, carefully regulated, and accurately licensed from the get-go. They simply have to tick those boxes to have any chance at scaling to a huge size without coming under intense scrutiny and being shut down or sanctioned. I’m not saying that blockchain companies who didn’t take that approach cannot become market leaders, but they do make it much harder for themselves.

We only have to look at Binance to see that my point is valid. Binance, and many others like them, launched crypto exchanges at a time when regulation and compliance was thin and underdeveloped. Yet, rather than pre-empting what kind of rules might be implemented later, they were nonchalant about it. The most notable incident was Binance’s $4.3bn fine and Changpeng Zhao going to jail. However, that did not occur in isolation. Binance was fined $2.25m in India for non-compliance in June, $4.38m in Canada in May for money laundering, and last month it received a $1.7m penalty in Brazil for violating derivatives trading laws. Let me also remind you that Nigeria is holding a Binance official for ransom over money laundering claims against the exchange.

Binance’s recent run-ins with the law and regulatory bodies should worry other exchanges whose stories are eerily similar. Regulations are going top down, starting with the big, low-hanging fruit. All of the big exchanges are currently facing issues in one way or another. Coinbase is embroiled in a battle with the SEC over clarity on crypto regulations, Bybit has just been forced to leave France due to regulatory pressure, and OKX recently exited India and Nigeria due to local compliance issues.

Crypto exchanges affect millions of people and billions of dollars, but it’s not only exchanges that regulators want to make more compliant. Ripple has the ambition to be one of the biggest financial services institutions in the world, and certainly in the blockchain space, with its near-zero fees and almost-instant transactions. Unfortunately, their much publicized legal challenges with the SEC have genuinely impeded the company’s progress and reputation, even if they’ve won some of the battles. Notably, Ripple has focused on compliance and regulation since launching in 2012, and that’s why they’ve been able to battle regulators so diligently and robustly defend their legal rights and positions.

Now, I suspect that Ripple and their XRP token were the big fish that the SEC regulators wanted to hook in, but it hasn’t quite gone their way. The SEC did, however, quite openly list some of the other major blockchains and tokens that they deem to be in violation of securities laws. When filing charges against Binance last year, they also named SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS and COTI as “crypto asset securities”.

Here’s the issue with regulators’ top-down approach - it means that whenever a DeFi platform becomes large enough, it will face scrutiny. This could incentivize platforms to stay small and avoid scaling, which suppresses innovation. On the other hand, any platform that knowingly and willingly facilitates rogue and unlawful transactions is completely complicit in the crime. The privacy benefits of the blockchain are not there to protect criminals.

To add to the situation, I’m concerned that without compliance, it is difficult to win the trust of institutional investors, which means that some genuinely revolutionary and high-utility technologies might never make it to the mainstream. There’s an ideological battle going on between the DeFi maximalists who want to exist in anonymity, providing underground financial services, and the real world, where compliance, regulation, and licensing is necessary to protect all parties. My advice is that any unregulated platform, protocol, or dApp that has big ambitions should seek immediate legal support to future proof their entity.