After the recent crypto meltdown caused by the downfall of crypto exchange platform FTX and its founder Sam Bankman Fried (SBF), the crypto world finds itself at a crossroads between regulation and radical decentralization. Regarding regulation, momentum is building up. For example, the Treasury Department’s Financial Stability Oversight Council has insisted on legislating for a tighter oversight of crypto, as it could ‘threaten the safety of the U.S. economy’. At the same time, the U.S. government is planning on legalizing crypto-asset sales by banks and crypto exchanges are open to the idea of tax regulation. However, regulators are likely to remain suspicious about industry actors, as SBF used to be the crypto space’s front man in welcoming Washington to regulate crypto.
On the other end of the spectrum, the crypto world itself hasn’t been silent either. Dominant actors try to restore trust by emphasizing the fact that this crisis is exactly what genuine decentralized finance (DeFi) could prevent, as (potentially fraudulent) gatekeepers are no longer needed. The FTX debacle is an example of the fallibility of centralized platforms and we can already see a surge in popularity of decentralized exchanges (DEX). In the UK, Japan, and South Korea, crypto associations already have established codes of conduct and standards to self-regulate, as governments have a hard time coming up with a solid regulatory response.
Even though it seems contradictory, regulation and decentralization don’t have to be mutually exclusive. Proof of Reserve, for instance, offers a solution in which decentralized technology is used for automated audits and to create more transparency. This example shows that truly decentralized solutions could actually work in the interest of regulators.