Following the collapse of crypto-exchange giant FTX, national governments are expediting the process of putting crypto regulations firmly in place. Many “crypto hubs” are reassessing how to capitalize on the benefits of the technology while proactively mitigating its risks. Noteworthy examples of jurisdictions where regulators are making headway — and grabbing headlines — include those in the United States, the European Union, the United Kingdom, Hong Kong and Singapore.
But the race to regulate crypto could actually be a problem, according to regulators at the supranational level. The Financial Stability Board (FSB) and the International Monetary Fund (IMF) are advocating the creation of globally coordinated crypto regulation standards before national authorities get locked into differing, even incompatible frameworks.
According to the FSB, the potential for across-the-board consistency and comprehensiveness of crypto-asset regulation is expected to “strengthen international cooperation, coordination and information sharing.” To achieve that, the FSB advocates equivalent regulations for digital assets and intermediaries that perform the same function as their traditional finance (TradFi) counterparts.
Meanwhile, on the user side of the equation, investors are now prioritizing self-custody crypto wallets and shifting toward decentralized exchanges, seeking greater transparency and control. This ongoing shift toward decentralized finance (DeFi) is causing national and supranational regulators to take another look at the benefits of decentralization, just as they set out to coordinate a global regulatory approach to crypto.
Shortcomings of centralized finance
As the FTX debacle revealed, the shortcomings and drawbacks of centralized exchanges (CEXs) reflect certain opaque qualities of TradFi, where much behind-closed-doors activity is accepted as a matter of course. In addition to the lack of transparency relating to balance sheets and client assets, centralized finance organizations keep their systems and records off-chain.
Meanwhile, DeFi offers permissionless financial products that offer high transparency regarding client funds and non-custodial wallets. In short, the undetected misuse of user funds we saw at FTX could never happen in DeFi. Built on public blockchains, the composability of smart contracts also enables considerable space for fintech innovation. For example, right now, we’re seeing a major uptick in efforts to improve DeFi’s user experience and user interface (UX/UI) design, especially as simple, user-friendly interfaces are the primary advantages for most centralized exchanges.