DeFi vs CeFi, ‘Regulation by Enforcement’, Emerging Market Opportunities, and Stablecoins vs CBDCs

Thomas Murray Digital Newsletter

Pantera Capital’s Dan Morehead (Photo by Steve Jennings/Getty Images for TechCrunch)

This issue’s stories cover the whole gamut of topics, from more regulatory debate and legislative progress, market opportunities, and questions over the best architecture for the future payment rails of global financial infrastructure:

  • Crypto hedge fund Pantera Capital asserts that recent crypto lender bankruptcies are down to old-fashioned over-leveraging and poor risk management, rather than symptomatic of risks specific to the digital asset sector, and a move to rigidly-applied smart contracts will provide increasing investor protections by taking out the human factor
  • Coinbase continues to bear the brunt of the SEC’s ‘regulation by enforcement’, in the words of the Commissioner of rival regulator the CFTC, as there continues to be disagreement on the definition of a security in the context of digital assets
  • Two reports highlight digital asset opportunities in emerging market regions including Latin America and Asia Pacific, with new revenue streams for exchanges identified and an estimate that there will be a billion crypto users worldwide by 2030
  • Stablecoin regulations are progressing in the EU, UK and US, while the debate continues over whether CDBCs or stablecoins should prevail for retail and wholesale payments use cases: can stablecoins function as ‘synthetic CBDCs’ in much the same way that commercial banks support fiat money supply under the existing system, and bypass issues with the potential for CBDCs to disintermediate commercial banks?

Digital Asset Developments


Crypto lender failures – is DeFi or CeFi to blame?
In the aftermath of the collapse of several lenders in the crypto-sphere – and the accompanying crash in cryptocurrency values – the CEO of crypto hedge fund Pantera Capital offers an interesting viewpoint countering the mainstream press narrative that this was a failure of the Decentralised Finance (DeFi) business model. In an investor newsletter, Dan Morehead points out that Celsius, BlockFi and Voyager Digital are not exemplars of the new financial world, despite operating in that sector, so much as traditional, centrally-managed and bank-like entities. These startups used VC funding to grow, but their fundamental business model was to take short-term deposits but to make long-term loans, all while massively over-leveraged, leading to the same results as experienced by Long Term Capital Management and Lehman Brothers, among other salutary tales from the world of traditional finance. This view corresponds with our previous article asserting that the bankruptcy of Three Arrows Capital was down to failures in governance and due diligence.
Conversely, the true DeFi protocols – including Aave, Compound, Uniswap and MakerDAO – continued to operate ‘flawlessly’ throughout the crisis. DeFi loan contracts are over-collateralised (typically in the 110-150% range, and as high as 300%) in much the same way as mortgages secured by real estate, providing effective risk management. The distributed operators of the infrastructure incentivised by yield on staked assets to use smart contracts to ensure the absolute consistency of the application of contract rules (removing the human factor) and the security of the protocols. The smart contracts forced Celsius and others to pay down their loans in order to avoid liquidation of their collateral, exactly as intended, and without introducing the complexities and potential for loss that a restructuring or breaking of contractual terms would entail. The newsletter highlights that the transparency of on-chain arrangements, such as DeFi smart contracts, allows open analysis of loan terms, leverage ratios, and performance, without having to take the representations of centralised finance (CeFi) players on trust.
Coinbase hits back at SEC over ‘regulation by enforcement’ in struggle to define digital securities
Reported by Bloomberg on Monday, the SEC has launched an investigation into Coinbase in an attempt to assess whether or not it let customers trade securities. The SEC published a list of crypto projects that it deems satisfy the Securities Act definition of an investment contract, seven out of the nine of which Coinbase supports on its platform. The digital asset provider vehemently refuted these claims in a blog post, stating the crypto exchange uses a thorough SEC-reviewed process for considering crypto projects for listing. Originally, the SEC’s interest in Coinbase stemmed from an investigation by the Department of Justice (DOJ) into insider trading which resulted in charges for a Coinbase product manager, his brother, and another party, with the SEC announcing its own civil case shortly after. The investigation coincidentally came hours after Coinbase filed a court petition calling upon the SEC to establish a clear regulatory framework for digital assets ‘guided by formal procedures and a public notice-and-comment process, rather than through arbitrary enforcement or guidance developed behind closed doors.’ The SEC’s approach has caught out a number of exchanges and crypto projects in the recent past, most notably Ripple Labs Inc., whom the SEC charged along with two executives with conducting an unregistered securities offering of its native token XRP. Adding the fuel of inter-agency rivalry to the fire, the Commissioner of the Commodity Futures Trading Commission (CFTC), Caroline Pham, echoed Coinbase’s indictment of the SEC and its behaviour, declaring on Twitter that the SEC’s broad classification of crypto projects as securities is a striking example of ‘regulation by enforcement’. The SEC has come under increasing pressure to issue a clear and concise framework that extends beyond the widely-used Howey Test, which was adopted in 1946, and not considered fit for purpose when considering digital assets.
The future of crypto exchanges: emerging market opportunities, revenue streams and institutional adoption
A recent report published by Boston Consulting Group (BCG), Bitget, and Foresight Ventures titled What Does the Future Hold for Crypto Exchanges? suggests that crypto as a technology and asset class is still in the early throes of adoption, and that it will really accelerate as it expands across the Latin America and Asia Pacific regions. These represent the greatest potential for growth due to under-developed traditional financial infrastructure, and offer opportunities for exchanges to offer crypto-backed services relevant to emerging markets such as loans, remittances, payment services, and tokenised stock trading. These services can supplement revenue streams that are also available to traditional exchanges but not as easily monetisable in the crypto world due to crypto’s more open nature, such as data, co-location services, market data feeds, and API high frequency trading connections.
The focus of the report looks at the role that exchanges play in the development of the digital asset ecosystem, which by the end of 2021 had accounted for approximately USD 54 trillion in crypto trading value. Emerging markets and ‘advanced APAC countries’ accounted for one third of global spot trading volumes and around 40% of global derivatives trading volumes in 2021.
The report also highlights that institutional adoption is continuing, with an expanding class of crypto-native funds leading the charge. The authors estimate that the number of crypto users will reach 1 billion by 2030.
A separate joint study by KPMG and HSBC on emerging corporate giants in the Asia Pacific region concluded that over a quarter of the 6,742 start-ups surveyed are blockchain related, with NFTs and DeFi proving the most popular themes. 32.8% of surveyed companies herald from China, 30.1% from India, 12.7% from Japan, and 8.7% from Australia, with a further 8 countries making up the remaining 5.2%.

Could stablecoins substitute CBDCs? Questions of adoption, privacy and bank disintermediation
The potential for Central Bank Digital Currencies (CBDCs) to facilitate domestic and international payments continues to receive significant attention. According to, 86 central banks have recently researched, piloted or launched CBDCs, with increasing numbers of countries exploring their applications in both retail and wholesale sectors. Stablecoin projects and their adoption have also increased considerably in the past couple of years, supporting the role of settlement in digital asset markets globally by operating on the same digital rails as cryptocurrencies, utility tokens and asset-backed tokens such as NFTs.
While some including the Financial Stability Board, US Treasury and the Bank of England have warned of potential financial stability risks from stablecoins, there is growing recognition that properly backed stablecoins are highly effective tools for bridging the gap between traditional and crypto finance. A recent report by the Federal Reserve Bank of Richmond suggests that stablecoins may be better placed to serve the needs of growing crypto-based economies and can serve as ‘synthetic CBDCs’. Furthermore, the Chief of the Australian Central Bank has suggested that private, regulated tokens such as stablecoins could beat CBDCs to the punch due to their increasing acceptability and adoption in the market, their support for privacy (at front of mind for many given the intrusive nature of China’s digital yuan), their wholesale applicability, and their compatibility with commercial bank activities which is not as clear cut for some currently envisaged retail CBDCs. Stablecoins are also being brought into the scope of draft regulations such as the EU’s MiCA, the UK’s Financial Services and Markets Bill, and the US Stablecoin Bill.
Interestingly, as reported this week, China’s Digital Currency Electronic Payment project is witnessing a slowdown in adoption of the digital yuan. The report shows that users are struggling to differentiate between the benefits of the nascent e-CNY and existing digital payment applications such as the widely-used WeChat and Alipay. Furthermore, citizens are increasingly concerned with privacy, leading the Chinese Communist Party to announce an effort to increase personal data protections in the project, although without providing specifics.

News Links

U.S. Bipartisan Stablecoin Legislation Delayed (Ledger Insights)
Senators Toomey and Sinema Introduce Bill to Exempt Small Crypto Transactions from Capital Gains Taxes (The Block)
Putin Signs Law Banning Crypto-based Payments in Russia (Cryptoslate)
Binance Fined Over $3.3M by Dutch Central Bank (Coindesk)
South Korea Postpones 20% Tax on Crypto Gains to 2025 (Cointelegraph)
Paraguay’s New Bill May Turn the Country into Mining Heaven (Cryptoslate)
Strict Thai Crypto Regulation Causes Siam Commercial Bank Group to Delay Bitkub Acquisition (Cointelegraph)
SEC Hasn’t Subpoenaed Binance About BNB: FOIA Response (Coindesk)
Binance CEO Files Defamation Case Against Bloomberg (AMBCrypto)
Taiwan Set to Ban Crypto Purchases Using Credit Cards (Coindesk)
California Ends Ban on Crypto Campaign Donations (The Block)
Central Bank of Ireland Highlights Weaknesses in Virtual Asset Service Providers’ AML/CFT Frameworks (Central Bank of Ireland)
European Banking Regulator Sees ‘Major Concern’ in Retaining Staff to Handle Crypto: Report (Cointelegraph)
  Rio de Janeiro Forges Ahead with Bitcoin Integration Plans (Cryptoslate)
  Komainu, a Nomura-backed Crypto Custodian, Granted Initial Provisional Regulatory Approval to Operate in Dubai (PR Newswire)
  Gemini Becomes First Company to Be Registered as Virtual Asset Service Provider (VASP) in Ireland (Gemini)
  Coinbase Secures Regulatory Approval in Italy (Coindesk)
  Cryptocurrency Exchange Expands to Italy (Coindesk) Continues Expansion with Cyprus (Cryptoslate)
  Standard Chartered-backed Zodia Markets Secures FCA Registration (Finextra)
  Central African Republic Begins Public Sale of Sango Coin (The Block)
Schroders Buys Stake in Digital Assets Firm (Finextra)
Block by Block: Blockchain Technology is Transforming the Real Estate Market (Cointelegraph)
Barclays Snaps Up Stake in $2bn Cryptocurrency Firm Copper (Sky News)
Saxo Bank Founder: Blockchain Has the Biggest Potential Since the Internet (Cointelegraph)
FTX and Coinbase Invest in ‘Bloomberg for Crypto’ Coinfeeds (Finextra)
BNP Paribas Securities Services to Develop Digital Assets Custody Capabilities Through Partnerships with METACO and Fireblocks (BNPPSS)
BNP Paribas Issues Tokenized Bond for EDF on Public Blockchain (Ledger Insights)
  BME, BBVA and IDB Issue Spain’s First Blockchain-based Regulated Bonds (Inter-American Development Bank)

BCP Group to Launch First Bond Issue on Blockchain in Morocco (Morocco World News)
Russian Firm Claims Digital Token First (Finextra)
UK to Explore Blockchain-based Government Bond (Ledger Insights)
IMA Broker Issues Blockchain-based Certificates of Insurance (Ledger Insights)
UK Finance Association Labels Crypto a ‘Good Alternative’ to Traditional Payments (Finbold)

Key: Regulation             Technology            Ecosystem              Markets 

CBDC Corner

BIS and Bank Indonesia Shortlist 21 Teams for CBDC G20 TechSprint Challenge (Finextra)
Central Bank Digital Currencies and Regulatory Alternatives: the Case for Stablecoins (Richmond Federal Reserve)
Private but Regulated Tokens Could Beat CBDCs, Australian Central Bank Chief Says (Cryptoslate)
Reserve Bank of India Working on Phased Implementation of Digital Currency (The Print India)
Indonesia Plans Wholesale Digital Currency to Improve Transfers (Bloomberg)
IMF Wants M-Pesa Shielded in CBK Digital Shilling Plan (Nation Media)
Lenders Are Thwarting Digital Currency’s Adoption in Nigeria (Bloomberg)

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