A recent crackdown by US regulators on the crypto derivatives exchange BitMEX has shown once and for all that decentralization is the way to move forward for those offering crypto-related services, several industry insiders argue.
According to the decentralized finance (DeFi)-focused newsletter The Defiant, the charges brought against BitMEX by the US Commodity Futures Trading Commission (CFTC) are “bound to push more cryptocurrency projects towards decentralization.”
The newsletter quoted Jake Chervinsky, general counsel at the DeFi platform Compound Finance, as saying that the regulator’s complaints against BitMEX wouldn’t apply to DeFi protocols since “most governance token holders don’t ‘operate’ a protocol in the way that owners of a centralized exchange company ‘operate’ a trading platform.”
“DeFi protocols are autonomous, self-executing code,” Chervinsky further said, adding that DeFi protocols – as opposed to centralized exchanges – don’t hold their users’ funds.
Also commenting on the developments, Anil Lulla, co-founder of crypto research firm Delphi Digital, is quoted in the article as saying that he sees the crackdown as good for DeFi “in the long term.” However, he also added that “it will still be interesting to see whether or not DeFi products can really dodge KYC/AML [know-your-customer/anti-money laundering] in the future,” while noting that regulators “could adapt with different types of penalties.”
Writing on Twitter yesterday, Lulla reiterated this view, saying the incident is “Bearish on CEXs [centralized exchanges] with no KYC,” and “bullish for DeFi long term.”
Sharing a similar sentiment was also crypto researcher at Messari, Ryan Watkins, who noted on Twitter that we have now seen both “a major exchange hack” (KuCoin) and a “major regulatory crackdown” in just the past week. “If you don’t understand the value of DeFi now you’re just not paying attention,” the crypto researcher added.
Despite decentralized finance applications largely aiming to avoid the long arms of regulators, however, some believe that government agencies will increasingly come after those who provide these services – often referred to by regulators as Virtual Asset Service Providers (VASPs).
“As DeFi continues to grow, it’s plausible that these decentralized exchanges can fall under the scope of global regulators. FATF [Financial Action Task Force] already considers decentralized exchanges “VASPs,” and FinCEN applies the same regulatory consideration to DEXs that it does to Bitcoin ATMs (BATMs),” blockchain forensics firm CipherTrace noted in a recent report on KYC practices in the crypto industry.
Regardless of how the crackdown might push a further decentralization of the industry, however, BitMEX users have already reacted by pulling their coins from the exchange, with more than BTC 23,000 (currently, USD 240.3m) leaving BitMEX in a single hour last night, as noted by on-chain analysis firm Glassnode:
According to our data, last night more than 23,200 BTC were withdrawn from #BitMEX addresses in a single hour (~13% of all BTC in their vaults).
— glassnode (@glassnode) October 2, 2020
It’s weird reading maximalists claim Bitmex fulfilled the ethos of Bitcoin? How exactly? By reintroducing trust? By creating a new elite of trusted financial intermediaries and gatekeepers? There’s more to Bitcoin than saying “F you regulators”
— Andrew ⟠ (@cyber_hokie) October 1, 2020
“A CEX which flouted the law, made its services explicitly available to US customers, and likely traded against them is getting shutdown. DeFi is screwed!!!”
No, sorry. I don’t think you understand how this works.
Now, watch as DeFi volumes swell in the coming months.
— DCinvestor.eth ⟠ aftab.eth (@iamDCinvestor) October 1, 2020