The application of blockchain technology has proven to be truly boundless over time with the emergence of diverse projects and initiatives. However, decentralized finance (DeFi) looks to be one of the most established applications being powered by the cutting-edge technology.
Although DeFi has been around for a couple of years now, the industry has just recently boomed, with more investors showing interest, while taking advantage of the numerous opportunities that reside within.
Sadly, with surging interest in the space from developers and investors alike, comes more scrutiny from the regulatory bodies who are also paying more attention than ever before to the emerging finance space. So what does regulation mean for the DeFi economy?
In an exclusive interview with DailyCoin, Lennix Lai, director of OKEx shares his take on the effect of regulation in the Defi economy. But just before we get into that, you may want to also take a look at Lai’s opinion on the future outlook of cryptocurrency’s regulatory landscape here.
In case you are unfamiliar with it, OKEx is a decentralized exchange (DEX) with a variety of customized solutions for traders at every level.
The OKEx DEX platform, which is based in Seychelles, provides a variety of trading tools and services, including liquidity pooling, cloud services, yield farming, exchanging, and collateral-based borrowing.
Moving forward, DeFi, according to Lai, has developed to a stage where it has become one of, if not the most proven applications currently running on blockchain technology.
“The second phase in the applicability of blockchain technology is DeFi, which in itself is a very big concept that we are barely starting from a boring landing. Now, we can’t say, we have zero use cases in blockchain anymore. Because we got DeFi, and that’s proven because the total value locked (TVL) in DeFi protocols right now has surpassed the 200 billion mark. So it’s getting higher and higher. It’s already proven, and loved by global users,”
Despite the enormous investment in the emerging industry, the DeFi economy has had to face a tough regulatory battle, making the future look uncertain.
Notably, OKEx is one of the more prominent projects to have graced the DeFi economy in recent times, and so is definitely not exempted from the potential impact of the ongoing regulatory efforts by various governments globally.
While some countries, although yet to fully regulate their crypto spaces, are receptive towards the crypto economy, the majority are neither for nor against it. In other cases, a handful of nations have imposed bans on any corporate activity relating to cryptocurrency, or the DeFi economy at large.
How Will Regulation Impact DeFi?
Prior to the arrival of DeFi, most exchanges that facilitate crypto transactions were partly centralized, which attracted a high degree of criticism from those arguing that the end-to-end processes of crypto assets were not as decentralized as they were made to seem.
However, the arrival of DeFi and decentralized exchanges (DEXs) changed the narrative, as most exchanges now employ a decentralized approach in the execution of crypto transactions.
While this appears to be a win-win situation for crypto enthusiasts and developers alike, they may yet have a bigger hurdle to face, underpinned by the potential regulations from various regulatory authorities.
By complying with regulatory standards, many believe that DeFi initiatives will lose their fundamental essence of decentralization and, in some circumstances, be limited in terms of the features they can provide to their consumers.
On the contrary, Lai thinks otherwise, and is, in fact, of the opinion that regulations will make DeFi stronger. According to him, DeFi needs to fit into the current KYC policy.
His argument was that, aside from the main value proposition, which eliminates middlemen and lowers the cost of financial transactions, there is still a strong likelihood that consumers will engage in illegal activities such as money laundering.
“Despite its unique value proposition by reducing the cost involving financial transactions, you still need to be fighting money laundering. So I think it’s okay to have the KYC element and AML element to be integrated into the current DeFi protocol. But it doesn’t really change the benefit of using DeFi, it just makes it even stronger,”
Lai used Bitcoin as an example, stating that it is gaining in strength by the day simply because a certain level of regulation has been put in place, hence why the first Bitcoin ETF was recently approved in the U.S. According to Lai, if the entire DeFi ecosystem can work in the same manner as Bitcoin, then just maybe they can grow equally as strong.
The Future of DeFi Lego
Speaking on the most exciting part of the DeFi economy, Lai made reference to a term dubbed “DeFi Lego,” which basically refers to a situation in which different financial elements are interlinked within an operational space.
“So Imagine you have a bank and you go to a bank and they’ve got a different kind of elements. You got a credit card, you got a mortgage, you got different commodities. But right now what we’re talking about is we break down the bank features and sever it into small pieces,”
By applying the same logic in the DeFi realm (DeFi Lego), Lai noted that it becomes easy to create custom financial products for consumers.
On The Flipside
- There is currently no universal regulatory framework in place, which means that each country’s approach to regulating the crypto space and, by extension, the DeFi economy, may differ, resulting in inconsistencies for projects seeking global expansion.
- The fact that DeFi projects may lose their core essence when regulated cannot be completely ruled out, especially as different approaches to its regulation will be employed across various countries.
Why You Should Care?
Regulation could either make or break the DeFi economy, especially if the aim is that, even if it is finally regulated, most DeFi initiatives will retain their fundamental, decentralized nature.
Watch the full interview here: