Regulation remains key to the development of CeFi: Paris Blockchain Week

Centralized finance (CeFi) will continue to be an important way to drive the introduction of decentralized financial services (DeFi) in the future, but regulatory considerations are still a significant part of the process.

This was a key theme that emerged during a panel entitled ‘How to get CeFi right – the balance between TradFi and DeFi?’ at Paris Blockchain Week. 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, vice president of market intelligence at Messari, highlighted the core difference between the two terms, which have become somewhat overlapping in recent years given the link between centralized exchanges and decentralized platforms:

“When you think about what we consider CeFi today, there are the centralized exchanges. There are people who provide custody services and lending services. But if it’s between DeFi and CeFi, you know, all these services can be built in different ways.”

Turner also highlighted CeFi’s role as the main ramp for the “next billion users” in the form of a fiat entry mechanism as well as a reliable path for larger professional investors to move into the crypto space.

Joaquin Sastre, BitGo’s LatAm & EMEA CEO, said the institution-focused wallet platform sees a key difference between the two categories:

“What really matters here, differentiating between CeFi and DeFi from our point of view, is really the access and the storage.”

Sastre maintains that adoption of DeFi protocols and platforms will be a natural progression, while CeFi continues to provide regulators with a means to offer some protection institutions through controls and legal parameters.

Related: 1inch Network co-founder to crypto newbies: ‘Don’t trust anyone, verify’ | PBW 2023

Ian McAfee, co-founder and CEO of Shift Markets, highlighted the importance of what CeFi platforms and DeFi protocols have to offer, while suggesting that the terminology itself serves more to describe and capture what the technology can do:

“Finance will only be using blockchain 20 years from now, right? So those words are just going to disappear.”

Charlie Meraud, CEO of cryptocurrency market maker Woorton, believes the two are becoming inherently linked, moving on from the original draw lists of DeFi that offered interest on liquidity pools that were better than anywhere else:

“We’re going to end up in a world where you take a credit risk with TradFi, or a technology risk with DeFi. You have to switch between these two and make them both live in the same world.”

CeFi also remains a key driver of cryptocurrency adoption according to McAfee, who said centralized institutions are still “waking up to crypto” as an asset class. Helping banks and brokers largely involves introducing them to CeFi services such as centralized exchanges:

“You give it to them in a format they are familiar with. The first thing people do is buy Bitcoin or the first thing that gives a taste of this new technology.”

Sastre also believes that tokenization of assets is another important driver of adoption served by both CeFi and DeFi players. He said that tokenization of financial assets and real estate is a “no-brainer” that will be driven by wider adoption of CeFi in particular:

“It gives you access to the asset to be able to trade around the world 24/7. It’s a huge benefit to the financial markets and also to ordinary people on the street.”

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 necessary given the fallout from the collapse of core CeFi players such as FTX over the past year:

“These things can be avoided if there is a separation of duties, if there are qualified, regulated custodians holding the assets and providing the proven truth about reserves.”

Turner also emphasized the importance of the cryptocurrency industry taking a more active role in driving conversations with regulators and government agencies to help the less crypto-savvy to 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 Wells Notice from the US SEC in relation to its betting services on March 22. This is a good example of a CeFi player offering DeFi-based services to its users.

Cointelegraph is on the ground during Paris Blockchain Week – providing live updates from keynote presentations, panels and interviews throughout the event.