Today’s iteration of DeFi could be criminalized by 2025. Here’s how its replacement could look

In the wake of an eventful 2022 for the crypto space, many investors are now wondering what the future holds. Early this year, the crash course the Terra ecosystem went on sent the space into a downward spiral, sinking millions in investor funds in mere days. Most recently, one of the biggest centralized exchanges, FTX, filed for bankruptcy, also dragging down millions in customer assets.

Such disastrous events have led a lot of crypto investors to start seeking protection and security, in the form of regulation. The crypto space is notoriously unregulated, but investors are suffering the consequences with losses of unprecedented magnitude. This is why the DeFi space will cease to exist in its current form, as more and more people and governments turn to regulatory frameworks as a saving grace.

Why regulation is needed in crypto

Since its rise to popularity more than ten years ago, the cryptocurrency sector has been plagued with security concerns. While the blockchain is a decisive step forward in terms of technological advancement, it also proved to be a breeding ground for new types of exploits and hacks.

From the draining of Mount Gox all the way back in 2011, to the latest FTX hack and subsequent bankruptcy, the crypto space has long suffered from malicious exploits. Billions of customer and institutional funds have been drained to date, while regulation is still scarce.

Some members of the crypto community argue that regulation will defy the original purpose of the blockchain and cryptocurrency as a decentralized financial system. However, the need for compliance and some form of monitoring is obvious. Without an approved standard of conduct and a regulatory framework regarding transparency of operations, decentralized finance will not be able to become a globally adopted financial system.

DeFi under threat

At the outset, decentralized finance, or DeFi, promised investors a self-sustainable market where intermediaries were virtually eliminated. With the control and responsibility put in the hands of decentralized node operators, everything was supposed to sail smoothly without the oversight of a centralized institution.

And to some extent, the DeFi sector has managed to achieve that. Cryptocurrency and decentralized finance opened up investment opportunities that were previously unavailable to the general population. Unlike the stock market, crypto is for everyone, and DeFi reflects that successfully.

Unfortunately, everyone includes hackers and malicious actors as well. DeFi smart contract exploits, scams, private wallet exploits and a lot of illicit activity still plague the space. This lack of security can bring DeFi in its current form to its demise. Investors are increasingly seeking ways to protect their assets, and currently, the crypto space is still struggling to provide that.

Throwing the baby out with the bathwater

While the strive for a regulatory revolution in crypto is in full force, the space and the community have a tough task ahead. Security must improve, but not at the expense of DeFi’s underlying principles.

There is a real threat that regulation might hamper and hinder what DeFi aimed to accomplish from the start - creating a free and accessible financial system for everyone worldwide. Decentralization must remain at the heart of the crypto space and all financial products it offers. Regulation will be beneficial for DeFi as long as it is carefully implemented and does not eliminate the good aspects of this financial system along with the bad.

The right kind of compliance

One major element that DeFi has to develop to be up to par with the community’s expectations is compliance. With the way things stand today, DeFi platforms and products often overlook important aspects of their operation and safety mechanics because there is a lack of unified standards and compliance guidelines.

If DeFi is to survive and solidify as a viable financial system, compliance standards should be put in place. There are already a lot of companies out there looking to improve the accuracy and transparency of blockchain-based services, yet adoption is not widespread.

Of course, it is important to find the balance between regulatory measures and compliance requirements and the freedom and decentralization which lay at the heart of DeFi. Creating a secure environment for DeFi projects and their customers is what the next generation of products in the space will strive for. And compliance with a unified standard across the whole blockchain ecosystem will help in reaching that goal.

DeFi is here to stay as a revolutionary, global financial system. However, the space must grow and evolve to meet the needs of its users. With some profound lessons to be learned following recent events and a strong push for change from the community, the DeFi space has a tough road ahead.

Coinfirm’s CEO, Dr. Mircea Mihaescu, has 30+ years of experience in technology and financial services blue chips, and startups; positions include COO, CTO and VP of Engineering. Co-founder of OwlRidge Capital, COO of US challenger bank Moven. Founder of SBT Venture Capital.