Centralized finance (CeFi) will continue to be an important avenue to drive the adoption of decentralized financial services (DeFi) in the future, but regulatory considerations remain an important part of the process.
This was a key topic that came up during a panel titled 'How to do CeFi right: Balancing TradFi and DeFi?' at Blockchain Week in Paris. A handful of industry experts weighed in on the current state of CeFi and DeFi, their relationship, and importance to the future of the space.
Eric Turner, Messari's vice president of market intelligence, highlighted the core difference between the two terms, which have overlapped somewhat in recent years given the link between centralized exchanges and decentralized platforms:
โWhen you think about what we think of as CeFi today, it's centralized exchanges. These are people who are offering escrow services and loan services. But if it's between DeFi and CeFi, all of those services can be built in different ways."
Turner also highlighted CeFi's role as the primary on-ramp for the โnext billion usersโ in terms of a fiat entry mechanism, as well as a trusted pathway for larger professional investors to enter the crypto space.
Joaquรญn Sastre, managing director of BitGo LatAm & EMEA, said that the institution-focused wallet platform sees a key difference between the two categories:
โWhat really matters here, to differentiate between CeFi and DeFi from our point of view, is really access and storage.โ
Sastre argues that the adoption of DeFi protocols and platforms will be a natural progression, as CeFi continues to provide regulators with a means to offer some institutions protection through legal controls and parameters.
Related: 1inch Network Co-Founder For Crypto Newbies: 'Trust No One, Verify' | PBW 2023
Ian McAfee, Co-Founder and CEO of Shift Markets, highlighted the importance of what CeFi platforms and DeFi protocols offer and suggested that the terminology itself serves more to describe and capture what the technology could do:
โFinance will only use blockchain 20 years from now, right? So these words are just going to evaporate."
Charlie Meraud, CEO of cryptocurrency market maker Woorton, believes the two are becoming intrinsically linked, moving on from the original DeFi cards that offered interest rates on liquidity pools that were better than anywhere else:
โWe are going to end up in a world where you take a credit risk with TradFi or a technology risk with DeFi. You're going to have to negotiate between those two and make those two live in the same world."
CeFi also continues to be a key driver for cryptocurrency adoption according to McAfee, who said that centralized institutions are still โawakening cryptocurrencyโ as an asset class. Helping banks and brokers largely involves introducing them to CeFi services as centralized exchanges:
โYou give it to them in a format that they are familiar with. The first thing people do is buy Bitcoin or the first thing that gives them an idea of โโthis new technology.
Sastre also believes that asset tokenization is another major adoption driver, which is attended by both CeFi and DeFi players. He said that tokenization of financial assets and real estate are 'no-brains' that will be driven by broader use of CeFi in particular:
โIt gives you access to the asset so you can trade it around the world 24/7. That is a great advantage for the financial markets and also for the normal people in the streetโ.
While CeFi continues to connect to DeFi protocols to serve both retail and institutional users, regulation remains one of the most important considerations for organizations and businesses looking to enter the cryptocurrency ecosystem through some form of exposure.
For BitGo's Sastre, regulation is an inevitable component that is necessary given the consequences of core collapse. CeFi players like FTX over the past year:
โThese things can be avoided if there is a segregation of duties, if there are qualified and regulated trust custodians that own the assets and give the verified veracity of the reserves.โ
Turner also stressed the importance of the cryptocurrency industry taking a more active role in discussions with regulators and government agencies to help the not-so-crypto-savvy better understand the ins and outs of the ecosystem:
"If we can regulate where the on-ramps and off-ramps are, I think that's incredibly powerful in allowing us to build everything else in this industry."
The regulation was a particularly hot topic given that US cryptocurrency exchange Coinbase received a notice from Wells from the US SEC in connection with its participation services on March 22. This is a prime example of a CeFi player offering DeFi-based services to its users.
Cointelegraph is present at the Paris Blockchain Week, providing live updates of keynote presentations, panels and interviews throughout the event.
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