Don’t be delusional: Decentralization doesn’t compensate for regulation

Opinion by Hong Yea, Co-Founder and CEO of GRVT.

The position taken by some crypto industry experts on regulation and compliance in the decentralized finance (DeFi) space can be striking at times. Whether at conferences and on panels or attending more casual side events, I’ve heard peers and competitors argue that DeFi is already self-regulated and has overcome the need for regulation. Their argument is based on the valid point that DeFi logic is embedded in the blockchain. 

The logic, however, ends right there.

There’s no room for human error

The most critical piece of information being overlooked is that humans set the logic, write the code and assemble the smart contracts. Most of us are willing to admit that we are prone to behavioral biases, whether conscious or not. Others are less willing to acknowledge that they carry some form of malicious or mischievous intent. Whether people confess or not is irrelevant. The proof is in the countless harmful actions DeFi has already witnessed.

The human-centric broken logic, the cat-and-mouse nature of security vulnerability and many traders’ naivety are why we need compliance in DeFi. A lawless Wild West of decentralized finance doesn’t serve people’s interests.

Trust is key to unlocking institutional investment

DeFi’s crucial missing element is trust. Even those building trustless DeFi products would probably agree that the system should ultimately be abandoned without trust. There’s some trust right now, but not as much as possible. Stringent, effective compliance measures are the missing link.

The loop is clear: DeFi builders need investment, investors and users need trust and institutions need compliance (this is also the case with traditional finance, or TradFi). Institutional inflows hinge on compliant behavior and playing the book for the builders to get their funds and the investors and users to get their trust. Protocols and platforms that don’t want to play along may be putting their integrity under scrutiny, but that’s a dilemma for another day. 

A commitment to decentralization is hard to argue against. Still, the vision for the future certainly seems to be at odds with those who want to see DeFi and TradFi (or CeFi) exist as opposites. DeFi appears to be a much-needed and positive technological development that addresses most of TradFi’s core problems (expensive, slow, centralized, exclusive, corrupt).

DeFi’s solution-centric design could lead us toward a perfect system, but the more room for human error, the less likely that already unlikely outcome. That’s why decentralization, no matter how pioneering, doesn’t compensate for regulation — let’s not be delusional about it.

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The transition toward compliance is a good thing

Regulation is the culmination of decades of careful adjustments, millions of hours of education and professional experience, and the scrutiny and nitpicking of countless experts. Regulation prevents incorrect and potentially harmful logic from being mistakenly (or maliciously) implemented into the system. That level of precision is necessary when trillions of dollars are at stake, and the industry’s future hangs in the balance.

Lawmakers in several countries have banned cryptocurrency outright because of how unregulated it is, and various other nations are considering following suit. Of course, there’s the other side of the coin, too — where other countries, like the United States, appear to be working hard and fast to legitimize cryptocurrency. Increasing the industry’s legitimacy is the most straightforward way to prevent bans in even more countries and regions. 

On top of the investments made by those leveraging their money in the markets to grow their wealth, we now have millions of professionals working in this space who depend on its success for their livelihoods. We owe it to each other to push for a more credible sector. That’s why, despite the mysterious, rebellious and counter-cultural origins of Bitcoin, it’s time to realign with the times to make DeFi the truly all-accessible powerhouse that it can be. 

The next step

Despite these words of encouragement, we must be acutely aware of the challenges along the way, not just the sentimental obstacles from those who won’t agree but also the natural friction that comes with enforcing progressive changes.

Before we reach a properly regulated DeFi world, we must start by ensuring that any logic embedded and integrated into this space is at least on par with regulations. Perhaps then, like most crypto founders who believe their tech is superior to TradFi, DeFi can compete with the regulatory system and code a better path forward.

Hong Yea is co-founder and CEO of GRVT. After a decade as a trader at Credit Suisse and Goldman Sachs, he co-founded GRVT in May 2022. GRVT aims to transform financial markets by integrating blockchain technology and self-custody solutions, focusing on blockchain settlement and trustless risk management. Hong’s international upbringing and business studies at Yonsei University shape his strategic vision for GRVT’s mission.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.