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How does CeDeFi Work from a Regulatory Compliance Perspective?

(Photo : How does CeDeFi work from a regulatory compliance perspective?)

Regulation is one of the most polarizing concepts in the cryptocurrency industry, and the debates for and against regulation are as old as the crypto market itself. On the one hand, some people think that the whole idea of cryptocurrency is to be free from government influence, and by extension, regulation. On the other hand, some people opine that regulations provide more legitimacy to cryptocurrencies, afford more protection to users; and help crypto integrate better into the global economy. 

Irrespective of your thoughts on crypto regulation, it is practically impossible to wish regulatory oversight away; yet, there’s a case to be made for ensuring that regulations do not stand in the way of decentralized innovation. In this post, we discuss the emerging centralized decentralized finance (CeDeFi) sector of the crypto industry with respect to regulatory compliance as crypto gains deeper integration with the global economy. 

The role of regulation in finance

Regulation is often positioned as being at odds with innovation, and this is especially true when regulators don’t even understand what they want to regulate. Crypto assets are only a little over 10 years old and still very early in their development; hence, regulation tends to be seen as hasty, stifling, distractive, and potentially limiting. 

However, regulation serves some purposes, and in the crypto industry, where the core idea is that you are your own bank; regulation might be a potent force for sustainable growth. To start with, regulation could be beneficial in managing fraud and market manipulation. The cryptocurrency market, due to the pseudo-anonymity that it promotes, has had its fair share of charlatans and fraudsters who engage in pump and dump schemes as well as outright rug-pull scams. Regulation could remove the cloak of anonymity and make it harder for fraudsters to perpetrate their financial crimes.

Similarly, regulation could enforce mechanisms to ensure the sustainable growth and development of the crypto industry. Cryptocurrencies are still highly volatile; while the volatility presents opportunities to traders; the average user who doesn’t quite understand the dynamics of the market might get burned. Well-thought-out regulations might enforce a certain level of user education, understanding, or financial solvency before users can be exposed to certain grades of crypto assets. Likewise, regulation could ensure stress-testing of crypto institutions such as exchanges and stablecoin issuers, to ensure that they can survive downturn without triggering economic shockwaves across the global financial system.

Regulation could also be useful in combating the money laundering and funding of terrorism and other such crimes. KYC and AML policies despite being controversial could add another layer of metadata to the transaction records immutably stored on the blockchain. And attaching identifying information to inflows and outflows of funds from crypto exchanges might help in the fight against terrorism. 

Regulatory compliance from a CeDeFi perspective

CeDeFi exchanges combine the best of centralized finance (CeFi) and decentralized finance (DeFi) to create new onramps and offramps of participation in the crypto economy. Unizen is a pioneer CeDeFi platform that provides access to innovative DeFi assets within the familiar framework of centralized exchanges. Unizen provides its users with the best of centralized exchanges and decentralized exchanges and then empowers them to make smarter trading and investment decisions. 

James Taylor, Chief Business Development Officer at Unizen affirms that CeDeFi is uniquely positioned to assuage concerns about regulatory clarity because “regulators will promote CeDeFi because they will be the overarching node that monitors transactions and stakeholders. In my banking years, banks were fined heavily for loose AML rules. If banks want to use DeFi, there is a need to bring compliance wrappers for AML/CTF and KYC on top of DeFi protocols”. From a regulatory compliance perspective, CeDeFi exchanges are making strategic decisions that help to provide much-needed regulatory clarity to the cryptocurrency industry.

Secondly, CeDeFi platforms, as being modeled by Unizen incorporate overarching nodes that collate and store metadata on transactions and stakeholders involved in such transactions. This transactional metadata, in turn, helps to figuratively ‘clean up’ the crypto market by making it harder for market manipulators, fraudsters, and scammers to operate. 

Thirdly, CeDeFi platforms de-risk the institutional adoption of crypto assets by embracing protective guardrails that make it easier for skeptical institutional traders and investors to include crypto assets in their portfolios. Currently, for traditional financial institutions to gain exposure to DeFi assets, they have to jump through the hoops of sorting through compliance wrappers for AML/CTF, and KYC requirements. Only the determined few bother to go through this hassle, and that’s one of the major reasons institutional capital is mostly still on the sidelines of the crypto market. CeDeFi provides a one-stop-shop to manage all the compliance requirements; thereby making it much easier for institutional capital to have exposure to crypto products. 

Regulatory-compliant CeDeFi platforms are the future of finance 

The finance industry has evolved over hundreds of years from medieval merchants to modern conglomerates. Crypto assets have emerged in the evolution of finance as an inherently digital means of tracking, storing, and transferring value. 

Despite the fact crypto assets are best suited for the modern digital economy, it would be naively arrogant to expect the world to abandon legacy traditional financial systems in place of a new financial system that is a little over 10 years old. Hence, for crypto assets to take their rightful place as the future of finance, there needs to be an intentional move to integrate them with traditional finance.

CeDeFi platforms serve as an intermediary of sorts by providing account creation, funds management, and regulatory protection to users participating in DeFi. James further notes that Unizen is an example of how CeDeFi combines the best part of CeFi and with DeFi by facilitating AML /CTF/KYC, compliant reporting, custodianship, and accountability, among other features…Unizen  can work as a regulatory sandbox on top of DeFi protocols. This will make sure that there is complete access to DeFi innovation while respecting the rules and standards of CeFi.

CeDeFi accelerates public trust in the crypto asset class by serving as a bridge for new traders and investors to start exploring opportunities in cryptocurrencies without the steep learning curve and technical expertise that DeFi demands.

CeDeFi merges the familiar nature of traditional finance with the innovative nature of decentralized finance to enable crypto assets to establish a stronger footing in the global financial system. We will be watching the CeDeFi sector closely to track how well it delivers on its promise to revolutionize finance in the coming years. 

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