We need compliant decentralized finance

Related: Corporate disclosure is the only way to get crypto institutionalized

So, what measures could DeFi projects, and the overall space, adopt to become more competitive and attractive to a wider client base? Let’s start with the basics:

Whitelisted addresses. A list of items/IP addresses that once they receive an initial validation are granted access to a certain system or protocol. In the case of DeFi, we could have one or two trusted anchors that could validate an address and conduct Know Your Customer diligence on the user. Once the user has been validated, all other projects within the same trust channel — i.e., a group of virtual asset service providers, or VASPs, that have agreed to follow the same set of rules and to collaborate within a well-delineated platform — can give that user access to products and services without having to redo the entire KYC process. 

The advantage here is twofold: The user only shows private documents to one or two entities, thus reducing the surface area of attack for any potential data hacks, and the VASPs can have access to a larger user pool without having to increase compliance costs. A system like this could also enable individuals and entities who are excluded from traditional banking, savings and trading ecosystems due to geopolitical reasons to invest in yield-bearing products, alternatives to lending and high-interest accounts. DeFi is an alternative for these citizens and business owners to save, earn and transact.

AML- and GDPR-compliant systems. Institutional capital markets are strictly regulated and supervised by local and international regulatory bodies; the goal is to prevent money laundering and the financing of terrorist operations. With an attestation framework, projects can verify and comply with existing AML regulatory requirements and attract institutional capital while protecting users’ privacy by not requiring them to create copies of their personally identifiable information.

Related: GDPR and blockchain: Is the new EU data protection regulation a threat or an incentive?

Audited codebases and third-party certifications. There are plenty of blockchain projects out there that are not built under minimum acceptable standards, and it’s difficult for every user to go through the codebase and verify that the code is doing what it is meant to do. By having third-party validators go through the code — attesting to its integrity, functionality and reliability — the bar would be raised, making these projects more competitive and safer for investors.

Insurance. This is a relatively
new area in blockchain, but there are projects that are tackling risk management through decentralized insurance. Insured projects can capture a wider audience that is willing to take on more market risk and less security risk.

Limits and safety margins. By building guardrails and layered security measures, users are given the option of increasing, or decreasing, their risk tolerance threshold. It also allows projects to limit their losses should a negative event impact them — for example, investment and withdrawal limits.

The right to choose is the right way

I strongly believe that individuals should be free to choose whether to risk their wealth on untested projects, on volatile investments and on bleeding-edge technologies; we shouldn’t have to rely on governments to tell us where, how much and when to invest. It’s ridiculous that an individual can spend thousands of dollars on lottery tickets but is not allowed to invest the same amount of money in venture capital projects without having to jump massive regulatory or bureaucratic hurdles.

This is why optionality becomes so important: It allows project builders to do what they do best and users to become the key driver in project evolution. The less credible a project is — especially in comparison with, for example, compliant, audited projects — the less capital and user base will flow toward it. These are market forces that should be allowed to move freely.

It’s important to also be clear that competition, in our space, is done on various levels; some require collaboration, some don’t. The overall objective is not to build the project that wins the short-term war but to build an industry that changes the lives of everyone, for the better, along with the way we do finance and wealth management — the way these are accessed by everyone, without unnecessary third parties or unbridled knee-jerk regulation. This is an infinite game.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.