Lưu trữ cho từ khóa: MiCA bill

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Bridging TradFi and DeFi: The opportunities of complaint stablecoins | Opinion

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As crypto becomes more widespread, the regulatory issues become more significant. The recent update of the Markets in Crypto-Assets Regulation regarding stablecoins has led to a substantial market boom. The new rules impose strict restrictions on the use of stablecoins denominated in dollars, which account for the majority of global trading volumes.

While MiCA primarily targets the intersection of crypto assets and traditional financial services, its implications for decentralized finance are more nuanced. DeFi, by its very nature, generally operates independently of the traditional financial system. But people still need to be able to move their money between the two worlds somehow, and I believe that compliant stablecoins are the best gateway for it.

The regulatory shift has influenced major players in the crypto arena, such as Circle and Tether, who issue stablecoins, forcing them to reconsider their strategies. So, what potential do compliant stablecoins have regarding the DeFi market? Let’s break it down.

The role of compliant stablecoins: Bridging TradFi and DeFi 

TradFI and DeFi have existed in parallel for a long time, and together, they can bring financial opportunities never seen before. However, bridging the two worlds is a challenging task. In this sense, compliant stablecoins hold huge potential to act as a bridge between them.

As regulations tighten, compliant stablecoins are expected to become major assets. For example, in the Europen Union, stablecoin users are already required to transition from unregulated coins to compliant ones (at least if they want to use them with centralized finance platforms, where the use of compliant assets is often strictly mandated).

Centralized stablecoins like Tether (USDT) and USD Coin (USDC) are at the forefront of this regulatory evolution. They are typically issued by entities that maintain reserves in fiat currency, which allows them to offer stability and serve as gateways between the crypto world and traditional finance. However, since they essentially provide a financial service, it means that they are subject to oversight and stricter standards of transparency and consumer protection.

Compliance is critical to ensure the legitimacy of these stablecoins and allow them to be integrated into the global financial ecosystem. Circle, as mentioned earlier, has already made a significant leap by becoming the first global stablecoin issuer to fully comply with the new regulations. And it is likely that we will see more companies choose this path in the near future.

Where do decentralized stablecoins stand?

It should be mentioned that centralized stablecoins still have decentralized counterparts that don’t have a direct impact on centralized financial services. These stablecoins are typically governed by decentralized protocols and don’t rely on a central issuer or a reserve of fiat currency.

Because they are not linked to the TradFi system, these stablecoins are not subject to regulations like MiCA. However, this also means they are less likely to be integrated into traditional financial services, limiting their role in bridging the gap between TradFi and DeFi. For now, decentralized stablecoins remain a component of the DeFi ecosystem that provides liquidity without the need for centralized oversight.

However, I believe that centralized stablecoins are going to become the primary way in and out of the blockchain space, and they will have to be compliant to ensure legitimacy and broader integration into the global financial ecosystem. Eventually, as time goes by, I think that all redeemable stablecoins might follow this path due to their custodial nature.

The risk of increasing stablecoin centralization

There are decentralized stablecoins out there that show the trend of leaning toward greater centralization. A notable example of this is the recent announcement by MakerDAO regarding the migration of Dai (DAI), one of the most popular decentralized stablecoins, to the new USDS. The move sparked a lot of discussions among the DeFi community, with many taking it as a shift towards a more centralized model.

Increased centralization typically brings with it greater regulatory scrutiny and compliance requirements. This could limit the use of such stablecoins within the DeFi environment, as they would become less attractive to users who value the decentralized nature of crypto assets. However, they might be able to take some of the business currently occupied by USDT and USDC.

Compliant stablecoins: Controlled financial system evolution 

There are several advantages offered by compliant stablecoins that make them a foundation of the future financial system. Firstly, and most importantly, they can be redeemed directly through banks and other financial organizations. This means that people can reliably bring their money outside of the crypto ecosystem and use it in their daily lives.

Additionally, there are yield opportunities for users. A huge number of crypto users are interested in profit-making, whether it be interest payments, staking rewards, or capital gains. And the yield products based on compliant stablecoins will be regulated, ensuring the ways to profit are legal and safe. Admittedly, decentralized stablecoins also often offer sources of yield that tend to be higher than what centralized stablecoins could offer. Whether they want to get yields protected by human laws or by math is something users can choose for themselves based on individual preferences and risk tolerance.

Moreover, the question of whether a stablecoin is fully backed by fiat will be eliminated. Adhering to transparency and security standards means that users will have greater confidence in the coins’ stability. In comparison, fully decentralized stablecoins offer full transparency on-chain already, so users can verify the backing of the coins for themselves. Again, the choice comes down to which trust mechanisms a user finds more reliable—regulatory frameworks backing compliant stablecoins or the algorithmic transparency of decentralized ones.

Conclusion

To sum up, the evolving regulation will play a crucial role in shaping the future of stablecoins and their ability to bridge TradFi and DeFi. The existence of compliant centralized stablecoins will help TradFi users engage with digital assets seamlessly and without worrying.

Decentralized stablecoins, meanwhile, will remain largely separate from traditional financial systems and regulations, serving different needs within the DeFi ecosystem. However, this could change as the lines between centralization and decentralization blur.

Of course, predicting the market’s trajectory over the years is quite challenging. However, one thing is certain—compliant stablecoins will enable the composability of TradFi and DeFi. I am sure that DeFi is the future of the whole financial system, and compliant stablecoins can enable a more traditional and controlled way to transform it.

Tổng hợp và chỉnh sửa: ThS Phạm Mạnh Cường
Theo Crypto News

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Building trust: Transparency will drive crypto market growth | Opinion

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The crypto market is ripe with the potential to revolutionize the finance world, but a big obstacle is still getting in the way. That obstacle is trust. For any business, particularly in finance, transparency is the foundation of trust that needs to be treated with all due importance.

When people hand over their funds to a third party, they need to understand who is in charge and how things are regulated. It is also important for them to know where their cash is going. But without such clarity, how are they supposed to feel confident about trusting a company with their hard-earned money?

In the world of crypto, this issue is even more crucial. Unlike traditional financial markets, where regulations are well-established, the crypto industry is still a newcomer, unexplored in many ways, which makes it a prime target for various criminals and bad actors.

Just recall the collapse of the FTX exchange back in 2022—it’s a glaring example of how things can go wrong when transparency is ignored. What happened? When the company filed for bankruptcy, it came to light that FTX had mishandled user funds. Shady business practices and a lack of clear disclosure led to massive losses for investors and sent shockwaves through the entire crypto market. This scandal highlighted the urgent need for stricter regulations and greater oversight across the industry.

Transparency and regulation: How are they to mix?

Regulation is essential for the crypto industry to grow and be seen as legitimate. As more institutional investors show interest in digital assets, the need for clear and consistent rules also increases. Otherwise, they won’t feel confident about exploring new waters, never knowing when they might draw the ire of one watchdog or another.

With this in mind, a good regulatory framework should strike a balance between fostering innovation that comes with blockchain technology and protecting consumers, thus helping crypto gain broader acceptance.

Places like the Middle East, Singapore, and the European Union are already setting the pace with progressive regulations. For example, in April 2023, the European Union rolled out the Markets in Crypto-Assets Regulation framework, aiming to create a unified approach to crypto regulation across its member states. Around the same time, Hong Kong introduced a new licensing system for virtual asset service providers, requiring them to get a license from the Securities and Futures Commission.

Among the recent examples, the Monetary Authority of Singapore decided to tighten its AML/CFT regulations and introduce new requirements for crypto service providers. And the UK is also taking steps to get in on the action. In 2023, the government passed the Financial Services and Markets Bill, empowering itself to regulate crypto assets and stablecoins.

All these efforts are undeniably important for building trust, legitimizing the crypto market, and paving the way for mainstream adoption of digital assets.

However, making transparency a unified standard on a global scale is no small feat that is difficult to achieve. The borderless nature of crypto complicates things, requiring international cooperation in order to create comprehensive regulations. However, this cooperation is still fragmented as different regions interpret regulations in their own ways, making it tough for crypto firms to navigate multiple jurisdictions.

Barriers like these hinder innovation and growth in the industry, which is why improving regulatory consistency and collaboration will be crucial going forward.

Improving transparency, one company at a time

While global regulation remains a work in progress, that doesn’t mean individual companies can’t already take steps to boost trust in the market. How can they do it? The most straightforward way for them is to maintain open communication about their financial status and operations.

When stakeholders get timely and accurate information, it helps build credibility and ease fears among concerned parties. This is how users and investors can separate legitimate businesses from questionable ones.

It bears mentioning that the crypto media, unfortunately, tend to focus on the negative side of things—scandals, hacks, or overhyped coin offerings. On the one hand, it’s not hard to see why: such news attracts a lot of attention and readers, which is beneficial for media outlets. However, it also means that legitimate innovations often get overshadowed, and the industry faces a lot more skepticism that could be avoided.

This is why it’s important for crypto companies to proactively engage with the media and use various communication channels to share accurate information. Raising awareness of the public about the positive developments in crypto can build trust and make the industry overall less intimidating. By taking this course of action, companies can establish themselves as credible parties in the market, which, of course, would only be beneficial for their operations.

As far as what actual methods they can employ, there are several key ones to highlight. Firstly, by engaging with the media, companies can highlight achievements, innovations, and internal processes. This gives them a proper foundation that people can see and believe in. Secondly, businesses can promote their leadership through interviews and public appearances during industry events, showcasing their expertise and positioning themselves as thought leaders in the market. Lastly, by maintaining active social media profiles, companies can provide regular updates to their user base whenever something important comes up. Direct interaction with the target audience is also a powerful way to showcase a company’s openness.

The details of these approaches can differ depending on each company’s goals and how willing it is to be open with the public. The journey toward transparency is a complex one, and not all companies are ready for it from the get-go. It often takes time for the top management to build up to this point and achieve the necessary mindset, but these efforts are vital for the industry’s growth and maturation.

A transparent future is a trustworthy future

As the crypto market continues to evolve, ongoing efforts to enhance transparency and educate the public will be crucial in legitimizing this industry and driving mainstream adoption. Guardrails and restrictions will be necessary to protect consumers and ensure wider public acceptance.

In the long run, by combining effective communication with robust regulatory collaboration, the crypto industry can grow stronger and capture the interest of the global audience.

This article was co-authored by Su Carpenter and Valentina Drofa.

Tổng hợp và chỉnh sửa: ThS Phạm Mạnh Cường
Theo Crypto News