DeFi - a step towards financial democracy

Thursday 9 September 2021 08:36 CET | Editor: Alin Popa | Interview

DeFi and CeFi can coexist and even benefit from one another in a symbiotic way, says Stephen Stonberg from Bittrex Global. So what is the role of DeFi in the future?

Your background is a very interesting one, switching from a traditional banking environment to the world of new-age finance. What made you take this step, and how does this background influence your work at Bittrex?

Having spent my entire career working in financial markets in London and New York with firms like Brevan Howard, JP Morgan, Goldman Sachs, and others, I was well prepared to cross the divide and make the move into the crypto ecosystem.

Despite some obvious differences, there’s quite a bit that traditional finance and the crypto world share in common. For starters, you still need an inside out knowledge of financial regulatory frameworks per jurisdiction, like securities laws, for instance. Not to mention the new and ever-changing crypto regulations by jurisdiction.

At the end of the day, cryptocurrency and some of the tokenized securities that we’re seeing represents a brand new digitally native asset class, making it a very exciting frontier to navigate. So to answer your question, the challenge of being at the ground level of a rapidly evolving space made my decision to leave traditional finance for Bittrex Global an obvious step. 

As DeFi becomes more mainstream, the democratisation of finance is upon us. But what does this mean for investors, consumers, and the traditional banking and financial services industries?

Decentralised finance (DeFi) truly represents a major step towards financial inclusion and a wildly democratised playing field, opening up access to new tools and resources for savings, investment, and wealth management to communities previously locked out of the legacy banking system.

For both investors and consumers, DeFi provides a new medium with which to earn interest, take out loans against your crypto assets and conduct transactions in a truly decentralised, peer-to-peer fashion. No intermediaries or middlemen charging hefty fees for financial services.

At the same time, some of the sharper, more forward-looking firms in the banking, hedge fund, and wealth management space can read the tea leaves and see DeFi as a newly ascendant front in the cryptocurrency space that they can invest in and get involved with.

So rather than an either/or proposition, I don’t think that DeFi will spell the end for CeFi (or centralised finance). Rather, I see each side working in tandem and providing direct benefits to investors and consumers.

DeFi services are maturing and beginning to disrupt traditional financial practices and services. Knowing that, what are the regulatory implications?

The DeFi space clearly presents an interesting challenge for regulators. First of all, DeFi projects may not actually trigger automatic regulation under current US financial laws, for example, that are currently being discussed for actual cryptocurrency and blockchain projects.

In large part, this is because US financial regulation hinges on the presence of an intermediary. But as DeFi transactions are conducted between individual users through unhosted wallets, they would not technically be subject to Bank Secrecy Act (BSA) requirements, including Know-Your-Customer (KYC) and anti-money laundering requirements.

If we look at the FinCEN guidelines, we can see that regulations depend on the participation of intermediaries providing hosted custodial services, wallets, exchanges, or other services. But because DeFi protocols support anonymous transactions, there is no meaningful way for market participants that are subject to the BSA to determine what requirements apply to their DeFi transactions.

Meanwhile, these new governance tokens issued by DeFi projects (which users can stake in return for voting rights over changes to the network) differ from the 2017 wave of ICO tokens in that it is unclear if these fall under securities guidelines as well.

Ultimately, a clear regulatory environment is needed if the space wants to continue to develop and attract new investments. And right now, a cloud of regulatory uncertainty hangs over the DeFi space. 

We could consider DeFi as a means of making financial transactions less expensive and more secure, while also increasing access to everyone. How do you think DeFi and traditional finance processes will cooperate or compete?

Again, I don’t see this as an either/or proposition for the time being. DeFi does bring a lot to the table in terms of lowering barriers to entry, increasing access, and providing people with a new framework for financial tools.

But I would argue that both DeFi and CeFi can coexist and even benefit from one another in a symbiotic way. For instance, despite all the innovation we’re seeing from DeFi, the space still has serious issues with security and threats to investors’ and stakers’ funds.

But the integration of some of these DeFi protocols beneath the CeFi umbrella could bring more legitimacy, more comfort to investors, and, most importantly, more of a regulatory understanding to the space as a whole.

The more regulatory guidance, the higher levels of adoption of DeFi services you’re going to see. However, this raises the question of whether or not DeFi would be truly decentralised if it were in fact so closely associated with CeFi.

CeFi could also bring some benefits to DeFi in terms of scalability. With all of the money that these Wall Street players have in their treasuries, it would be nothing for them to sponsor and get involved with some of the DeFi projects, without tampering with the ethos behind decentralisation of course, to allow for more innovation, lower costs, and a greater reach into new markets.

In the evolution of DeFi what kind of solutions are needed most in the coming years?

If the DeFi space wants to continue to mature and develop and reach more users outside of the crypto space, we are going to need to seriously address the issue of hacks, phishing, and other scams. There are far too many stories emerging from the space about millions of dollars of crypto assets being stolen from a variety of different DeFi protocols and exchanges; that needs to end quickly if mainstream users are ever going to feel comfortable taking control of their own finances without the need for an intermediary.

Centralised finance and intermediaries certainly have their faults, but most people would rather opt for that route over DeFi at the moment. Why? Security. Security is the number one priority that the decentralised finance space needs to get a handle on.

Other than security, education is key in terms of reaching new markets and getting more people around the world comfortable with an entirely new framework of transacting, saving, and investing.

About Stephen Stonberg

Stephen has spent his entire 25-year career working in financial markets in London and New York. He left the traditional world of finance to get involved in the crypto and blockchain industry. He now serves as the CEO of Bittrex Global, one of the most reliable and secure cryptocurrency exchanges in the world.

Prior to Bittrex Global, Stephen joined the Investment Management Division of Goldman, Sachs & Co. Stephen advised executives, entrepreneurs, and foundations on all items of economic impact to their balance sheet. Prior to joining Goldman Sachs, he advised some of the world’s most sophisticated investors as a Partner and US CEO at Brevan Howard, Head of the New York office at Winton Capital, and Managing Director at Credit Suisse Asset Management.

Prior to this, Stephen worked as a Managing Director in Fixed Income Sales and Trading at JPMorgan, and in Mergers and Acquisitions. Stephen holds an MBA from Harvard Business School and a bachelor’s degree in Economics from Columbia University. He has served on several public companies and non-profit boards.

About Bittrex Global

Bittrex Global, the most secure digital asset exchange in the world, serves both retail and institutional clients, globally. Committed to helping users build wealth, Bittrex Global facilitates the purchase and trade of tokenized stocks, stablecoins, and over 250 utility tokens. Through its use of cutting-edge technology, advanced security protocols, and a sophisticated elastic multi-stage wallet strategy the company provides a high-level experience for professional and novice customers alike. Bittrex Global is a key player in driving widespread adoption of secure and decentralized methods to building wealth while remaining compliant and adhering to the wide array of regulatory measures across the globe.

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Keywords: DeFi, financial inclusion, regulation, crypto asset, tokenization
Categories: Blockchain & Cryptocurrencies | Cryptocurrencies
Countries: World
This article is part of category

Blockchain & Cryptocurrencies