TradFi to DeFi — Weekly Wrap Up Pilot!
By: Tradfi To Defi
Tags: Tradfitodefi, Scalability Trilemma, Tradfi, Debt, Defi

Every Friday at 3 pm EDT, the TradFi to DeFi community has an open mic round table, where we discuss DeFi (decentralized finance), how it intersects with traditional finance, and where we see this whole thing going. This article briefly summarizes the topics of our latest discussion.

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Binance Blowout and Big Bank Blockchain

It was a big week for DeFi news. Binance, the largest crypto exchange by volume, was kicked around the regulatory landscape like a football in a schoolyard. Ontario was the first jurisdiction to hand down a Statement of Allegations, which saw the crypto giant close shop entirely in the region. This move broke the regulatory dam, with the UK, Thailand, Japan, and the Cayman Islands all piling on to Binance shortly thereafter. The exact reason for the timing of these announcements remains unclear. Still, the sharp minds in the TradFi to DeFi community proposed some insightful potential explanations that we’ll check out momentarily.

While Binance was dancing on opaque regulatory lines, existing financial entities experimented with this wacky DeFi stuff. Some members of the DeFi industry scoff at banks using blockchain. Nevertheless, the deep pockets of major banks tend to move the needle, even if they’re not on the bleeding edge of the technology. Goldman certainly agrees as they kicked off trading on rival JPMorgan’s repo blockchain. They join over twenty-five of the top fifty global banks already using the Onyx network at the perfect time — the Fed’s reverse repo program almost hit $1 trillion.

The growing popularity of permissioned blockchains by global banks makes sense — having a controlling entity helps with scaling and largely solves the blockchain trilemma. Originally proposed by the blockchain auditing firm Certik, this trilemma suggests that blockchains can be two of three things: secure, decentralized, or scalable. Adding more to one variable means taking away from one of the other two variables. Many projects actively work to overcome this trilemma, but for the time being, it’s a pesky reality that’s waiting for an elegant solution.

Under The Hood

So, we have seemingly coordinated regulatory action against the world’s largest crypto exchange while major global banks migrate to their own permissioned blockchains. While the concept of a small group of puppet masters controlling global regulatory affairs makes for a very cool action movie, all that glitters is not gold. Some thoughtful members of the group reminded us of the quasi-interoperable nature of legal jurisdictions.

While diverse, many legal realms speak a similar dialect. Following Bitcoin’s breakout to new all-time highs, many regulatory bodies worldwide likely began the meticulous process of reviewing various legal entities’ legal status. After being blindsided by the 2017 bull market, regulators don’t want any more egg on their faces. It comes as little surprise that having likely shared a similar start date, these reviews would conclude in relative unison. It’s not an explanation worthy of a James Bond movie, but it passes the Occam’s razor test and remains the likely scenario.

Global regulators aren’t handing out orders in a vacuum either. The Basel Committee recently requested public comments for a prudential framework for crypto assets. With talks of global minimum corporate tax and coordinating regulations, the Basel Committee will likely continue this trend in handling crypto, imposing any subsequent regulations in a multilateral fashion. However, regulators should remain wary of the Streisand Effect — by banning existing industry giants and calling attention to segments of the industry they find unpreferable, governing bodies risk pushing the most innovative aspects of the industry to the periphery.

Behind The Wheel

While all glitters ain’t gold and regulators aren’t vacuuming, the reality of the situation is that they need to act fast as they’re getting absolutely smoked at their own game. BlockFi recently announced DeFi interest rates that marginally beat the rates offered at Coinbase. At the time of writing, users staking less than five Ethereum receive 4% APY on their staked asset. With most banks in the developed world offering far less than 0.5% for deposits, the regulatory scramble isn’t all that surprising.

If DeFi interest rates are the rock, then the exploding US debt is certainly the hard place that the global economy finds itself between. We’ve added almost $10 trillion worth of debt in half a decade, representing the most voracious increase in history. Not much to add on this topic other than the classic Ron Burgundy, “Well that escalated quickly.”

Wrapping It Up

Trying to keep up with every development in DeFi is a bit like reading War and Peace backwards in a rocket car. Thankfully, we’re all in this together, learning as we go and sharing as we grow. We’d love to connect and hear your story! Check out our social media channels below and join the conversation — there’s so much to talk about!

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Author

Ray Buckton, member of the TradFi to DeFi community and builder of financial alternatives. Follow me on Twitter!