New Regulatory Lemons Await Somewhere Between DeFi & CeFi
While local and global regulators are yet to target the nascent DeFi (decentralized finance) world, some industry players warn that the interaction between DeFi and CeFi (centralized finance) sectors will bring even more unanswered questions.
There is a constant interaction between the DeFi and CeFi worlds, e.g., industry players are taking loans from centralized institutions and then interacting with (more or less) decentralized projects.
“Who is responsible in case there is an issue with the software? This legal responsibility of developed software is a big subject we need to answer for the market to be truly global,” Zahreddine Touag, Co-founder and Head of Trading at liquidity provider Woorton, said during a panel at Paris Blockchain Week Summit earlier this week.
Touag added that the actors are “very much connected” to the centralized world, making markets on centralized exchanges and borrowing or lending from centralized institutions or decentralized protocols.
They act as intermediaries inheriting the risk, and if there is an issue even in the decentralized space, they will be responsible, according to Touag, who estimated that intermediaries will be interacting with the both spaces even more.
Meanwhile, Daniel Leon, Co-founder and Chief Operating Officer of major crypto lender Celsius Network (CEL) and another panelist, said that DeFi is still “playing catch up” with traditional finance but there is evidence that more institutions are going in the right direction. He said it’s all about a tradeoff between chasing the yields while not risking too much.
Also, Leon Marshall, Head of Institutional Sales at another major crypto lender Genesis Global Capital, stressed that it is unclear what the final regulatory regime for DeFi would look like – it could be regulated at the on-ramp/off-ramp (e.g. exchanges) level like bitcoin (BTC) — or via new, yet unknown alternative methods.
However, he said that his firm is “super excited” about DeFi.
In their Q3 report, the company revealed that ethereum (ETH) loans outstanding jumped to 12.4% of the overall book, USD increased to 34.5%, and smaller altcoins jumped to almost 5.0%.
Genesis claims that the main driver of this portfolio shift came from the impact of liquidity mining on DeFi protocols.
“We saw DeFi interest rate arbitrage drive significant new issuance where our trading counterparties started actively borrowing ETH and stablecoins to lever up liquidity mining strategies,” they said, adding that “these counterparties, at the same time, borrowed the associated governance tokens such as UNI, YFI, COMP and LEND to hedge their future in-kind earnings.”