DeFi

Why Swiss and Hong Kong crypto regulations will lead the DeFi revolution

Published

7 months ago

29 June, 2024

Why Swiss and Hong Kong crypto regulations will lead the DeFi revolution

The following is a guest post from James Davies, CEO of Crypto Valley Exchange.

Regulators worldwide, international organizations, and market participants have published many consultation papers, recommendations, and opinions. The writers include groups like the Global Financial Markets Association, the Institute of International Finance, the International Swaps and Derivatives Association, the Futures Industry Association, the Financial Services Forum, and IOSCO (International Organization of Securities Commissions).

All major players from Coinbase to Circle are publishing responses to the regulatory framework and legislative drafting worldwide.

All of this is brought together in an IOSCO paper, “Policy Recommendations for Crypto and Digital Asset Markets,” which, rather unbelievably, doesn’t mention permissionless protocols once and only decentralized in passing.

I pity the regulator that bases its crypto policy development on this publication. Separately, IOSCO published a “Policy Recommendation for Decentralized Finance,” which combines their analysis with the Financial Stability Board (FSB) report “The Financial Stability Risks of Decentralised Finance.”

However, and this is a major criticism, the papers miss the core idea of decentralized projects. Trying to succinctly explain where they are wrong and what they can do to shift the perspective takes more input from insiders. The essential goal of decentralized projects is “to create the project features as the result of emergent behaviors through the actions of unrelated and replaceable actors.”

These effects are emergent, making decentralized projects so difficult to regulate. The report makes some reasonable insights, such as run-risk on assets from liquidity mismatch, such as the events that collapsed TerraUSD/Luna, and the roll-forward of this hitting Celsius very reminiscent of the events in 2008, the “collateral chain” risk.

Notably, traditional finance regulators still do not cover this well, where banning new activities dominates integration and understanding.

It also makes valuable points on cross-border regulatory arbitrage; however, this is where it demonstrates very precisely that it doesn’t understand DeFi. These structures make identifying appropriate legal ownership/control and relevant legal authorities difficult. It presupposes that there is a legal ownership and control point, the antithesis of decentralization.

This doesn’t mean that there aren’t some DeFi entities that do have these, and while running via smart contracts on-chain are not more like centralized entities, these, though, will get picked up in the core of the rest of the crypto regulation.

IOSCO doubles down on these misapprehensions about how decentralization works in some of their recommendations to regulators, especially the recommendation to identify responsible persons. Comments suggesting layer-1 blockchains might be considered clearing and settlement operations feel bizarre.

Other areas to look at include leverage, lending pool structures, tokenization, pseudonymous information, reporting, IP, and off-chain/on-chain touchpoints. Continued adoption and growth are undoubted and will have major impacts on world economies and traditional finance over time.

Most notably, every respondent to IOSCO, that is, every major regulator, when asked to provide an overview of current regulatory treatment, stated that they do not have separate regulatory frameworks specially dedicated to DeFi activities. They further note that whilst respondents state that they have regulation for crypto underway, they are not specifically targeting DeFi. Respondents also express their views that existing frameworks can apply to DeFi protocols.

Like social scientists everywhere, the Bank of International Settlement also seeks to understand the DeFi landscape. Their process is being examined through the lens of categorizing DeFi. While they appear to do an adequate job in this respect, it comes across in the conventional manner of treating each project as a standalone company.

To summarize the areas of concern from IOSCO:

Conflicts of interest arising from vertical integration of activities and functions
Market manipulation, insider trading, and fraud
Cross-borderrRisks and regulatory cooperation
Custody and client asset protection
Operational and technological risk
Retail access, suitability, and distribution.

How should regulators look at DeFi?

Rigid classification-based regulation has led to many unintended consequences; Sarbanes-Oxley requirements drove companies away from public markets. The subprime mortgage crisis resulted from a focus on individual loans and not their aggregation. The initial responses to the rise of the Internet and digital business were slow and reactive. By the time regulations arrived, companies already had established practices. Uber and Airbnb’s growth was restricted by a patchwork of local regulations that didn’t support these business models.

Urban planners misunderstood the effect of adding roads, leading to more traffic issues rather than less. The climate models debate focuses on specifics rather than the emergent effects, clouding the issues.

Regulators should start with governance structures, not individual properties. DAOs typically have a presence of some form, such as an organization with a corporate identity, often because a Labs entity needs something to hold the equity to pay real-world bills.

These entities, though, are often controlled entirely through the DAO. Requiring DAO registration and setting up specific corporate entity types that match how they operate would add value. Setting transparency, reporting, voting, staking, delegation, and control rules would remove the ambiguity on how to operate. Weed out abusive entities that want to rug pull and encourage entities that want to operate in a decentralized manner genuinely.

There can be many further developments related to operation style, such as requiring those that border otherwise regulated activities to have the appointed people selected by the DAO to face future regulatory developments in these areas. However, engaging and setting a framework for DAO establishment would be a good start.

A second area for examination would be about mutual recognition, currently regulation is fragmented, in some areas such as derivatives markets mutual recognition works well, in payments and crypto it acts as a barrier to growth creating a difficult patchwork of regulation. If DAO regulation were recognized between major regulators, then regulating in one country would enable access to other countries, a major incentive to projects to choose a grown-up location for their DAO, a good indicator to users of the intent of those involved in the project.

More thought needs to be given to dealing with emergent properties related to aspects such as clearing and settlement. There are compelling reasons why these should exist. For a start, trading on-chain assets supported by on-chain collateral causes real issues for existing traditional finance aspects. We all want to support this tokenization and transparency push, but this doesn’t come without traditional finance equivalents. This is about the disintermediation of existing power bases and control and the empowerment of new economy models, but friction in these systems needs to drop to establish. It is almost the precise point of free markets.

Ethical behavior, transparency, and clarity at the top of the list, along with DAO registration and support, can begin this. Regulators will need to become much more educated in the mechanics of these protocols and their operations to ensure they slowly build the right regulation, not just restrictive regulation.

How Switzerland and Hong Kong have gotten right what the US gets wrong

The crypto industry is still largely in its infancy, and regulators are still figuring out how to oversee its various aspects, but not all efforts are equal.

Once a beacon of innovation, the US has become a challenging jurisdiction for crypto finance projects, let alone decentralized versions. It is well documented how the country’s relatively strong anti-crypto stance and enforcement-heavy approach has stifled growth, driving founders to seek more welcoming environments.

Meanwhile, Switzerland and Hong Kong have crafted regulatory frameworks that accommodate crypto and permissionless projects.

The Swiss Financial Market Supervisory Authority (FINMA) doesn’t regulate protocols based in Switzerland if the activities conducted on the protocol result from the actions of actors based outside Switzerland. They are accessible, transparent, and engaging. Self-regulatory approaches, in general, are well supported.

The Securities and Futures Commission (SFC) of Hong Kong assesses each Defi project on a case-by-case basis, balancing a “same business, same risk, same rules” approach for crypto in general with a more nuanced position on permissionless protocols. At the same time, the US Securities and Exchange Commission (SEC) has confused and caused the US to fall behind the pack.

The EU is focused on examining everything through a payments lens, and the UK talks a better game than it implements. By embracing crypto’s unique needs and fostering a culture of entrepreneurship, these jurisdictions have become the go-to destinations for crypto companies seeking regulatory clarity and freedom to experiment. They are likely to do the same with DeFi.

As DeFi continues to evolve and transform the financial landscape, the role of regulatory frameworks becomes crucial in shaping its trajectory. With digital assets gaining momentum, tokenization under discussion, and traditional finance entering the space, the quest for regulatory environments that not only accommodate but also nurture DeFi is intensifying more even than just centralized crypto entities.

Navigating the DeFi Regulatory Landscape

With the current hot crypto market and lots of capital flowing into projects, the number of projects establishing DAOs over the next 18 months will be huge.

From a regulatory perspective, it’s time for them to set out their intent for these entities and the services that will be possible through these protocols.

Regarding the regulatory landscape for current DeFi projects, we see why more and more industry professionals feel drawn toward Switzerland’s approach. While the EU’s MiCA Regulation offers a comprehensive, harmonized framework with detailed rules for consumer protection and market integrity – appealing for projects seeking a uniform environment for cross-border European operations – Switzerland’s principle-based approach, flexibility is more compelling for projects not focussed on payment services. Not every project fits neatly into a one-size-fits-all mold; Switzerland seems to understand that.

Switzerland’s willingness to foster a supportive ecosystem, exemplified by Crypto Valley in Zug, is remarkable. Being part of a vibrant community with access to capital and opportunities for experimentation and growth is a crypto native’s dream.

Switzerland’s regulatory philosophy and pro-business stance make it particularly appealing. Innovative projects will have a better opportunity, be more likely to get regulatory clarity early and emerge from this thriving ecosystem, pushing DeFi boundaries and shaping finance’s future evolution. Switzerland’s approach resonates persuasively.

Hong Kong: A Financial Renaissance

Hong Kong is redefining its role as a crypto hub by implementing its new Virtual Asset Service Provider (VASP) regime. This regulatory framework introduces a structured yet dynamic environment that supports crypto innovation while maintaining robust safeguards.

The comprehensive VASP licensing ensures crypto platforms meet stringent criteria for liquidity, customer protection, and cybersecurity, fostering a balanced approach to regulation and innovation. By permitting retail trading of cryptocurrencies, Hong Kong nurtures a vibrant ecosystem that attracts retail investors while upholding necessary safeguards. It has yet to develop Defi specific regulation, we can only encourage to look at this holistically, developing DAO regulation first, but the approach to the rest lends confidence that this is a good location for businesses to establish whilst we wait.

Regulatory routes forward

Countries mustn’t follow in the footsteps of those who have failed to innovate in this field. The US, for instance, has been slow to adapt to the changing financial landscape, with regulatory uncertainty stifling growth and innovation. Meanwhile, US companies keep demanding clarity on regulation, with giants like Coinbase and their legal team demanding the SEC engage in rulemaking. Similarly, countries like Japan and South Korea have struggled to integrate crypto into their traditional financial systems, leading to a lack of progress.

Countries, including the US, must divide and approach centralized and decentralized activities differently. Some decentralized activities, such as market rate set risk, have many risks that could be prevented fairly easily under the right approvals regime. We know this will come and squeeze some major players, but early transparency on the direction will save the industry a lot of costs.

Currently, we look to countries like Switzerland and Hong Kong, which have taken a proactive approach to crypto, to lead in creating a supportive regulatory environment that will foster innovation and growth in Defi. By learning from their example, other countries can catch up and move forward rapidly.

While the future of decentralized tech watches the American Dream turns into a coma, Swiss developers are pouring Aperol and planning their ski trips.

Fuente

DeFi

Haust Network Partners with Gateway to Connect to AggLayer

Published

6 months ago

1 August, 2024

Financial Block Staff

Haust Network Partners with Gateway to Connect to AggLayer

Dubai, United Arab Emirates, August 1, 2024, Chainwire

Consumer adoption of cryptocurrencies is a snowball that is accelerating by the day. More and more people around the world are clamoring for access to DeFi. However, the user interface and user experience of cryptocurrencies still lag behind their fundamental utility, and users lack the simple and secure access they need to truly on-chain products.

Haust Network is a network and suite of products focused on changing this paradigm and bringing DeFi to the masses. To achieve this goal, Haust Network has announced its far-reaching partnership with bridgeseasoned veterans in rapidly delivering revolutionary blockchain utilities for projects. The Gateway team empowers blockchain developers to build DAOs, NFT platforms, payment services, and more. They drive adoption of crypto primitives for individuals and institutions around the world by helping everyone build their on-chain presence.

Gateway specializes in connecting sovereign blockchains to the Aggregation Layer (AggLayer). The AggLayer is a single unified contract that powers the Ethereum bridge of many disparate blockchains, allowing them all to connect to a single unified liquidity pool. The AggLayer abstracts away the complexities of cross-chain DeFi, making tedious multi-chain transactions as easy for the end user as a single click. It’s all about creating access to DeFi, and with Polygon’s technology and the help of Gateways, Haust is doing just that.

As part of their partnership, Gateway will build an advanced zkEVM blockchain for Haust Network, leveraging its extensive experience to deploy ultra-fast sovereign applications with unmatched security, and enabling Haust Network to deliver its products to its audience.

The recently announced launch of the Haust Wallet is a Telegram mini-app that provides users with access to DeFi directly through the Telegram interface. Users who deposit funds into the wallet will have access to all standard send/receive services and generate an automatic yield on their funds. The yield is generated by Haust Network’s interconnected network of smart contracts, Haustoria, which provides automated and passive DeFi yielding.

As part of this partnership, the Haust Network development team will work closely with Gateway developers to launch Haust Network. Gateway is an implementation provider for Polygon CDK and zkEVM technology, which the Haust wallet will leverage to deliver advanced DeFi tools directly to the wallet users’ fingertips. Haust’s partnership with Gateway comes shortly after the announcement of a high-profile alliance with the Polygon community. Together, the three will work to build Haust Network and connect its products to the AggLayer.

About Haust Network

Haust Network is an application-based absolute liquidity network and will be built to be compatible with the Ethereum Virtual Machine (EVM). Haust aims to provide native yield to all users’ assets. In Telegram’s Haust Wallet, users can spend and collect their cryptocurrencies in one easy place, at the same time. Haust operates its network of self-balancing smart contracts that interact across multiple blockchains and then efficiently funnel what has been generated to Haust users.

About Gateway

bridge is a leading white-label blockchain provider that offers no-code protocol deployment. Users can launch custom blockchains in just ten minutes. They are an implementation provider for Polygon CDK and have already helped projects like Wirex, Gnosis Pay, and PalmNFT bring new utility to the crypto landscape.

About Polygon Labs

Polygon Laboratories Polygon Labs is a software development company building and developing a network of aggregated blockchains via the AggLayer, secured by Ethereum. As a public infrastructure, the AggLayer will aggregate the user bases and liquidity of any connected chain, and leverage Ethereum as the settlement layer. Polygon Labs has also contributed to the core development of several widely adopted scaling protocols and tools for launching blockchains, including Polygon PoS, Polygon zkEVM, and Polygon Miden, which is currently under development, as well as the Polygon CDK.

Contact

Lana Kovalski
haustnetwork@gmail.com

Fuente

DeFi

Ethena downplays danger of letting traders use USDe to back risky bets – DL News

Published

6 months ago

1 August, 2024

Financial Block Staff

Ethena downplays danger of letting traders use USDe to back risky bets – DL News

Ethena and ByBit will allow derivatives traders to use USDe as collateral.
There is a risk in letting traders use an asset partially backed by derivatives to place more bets.

Ethena has downplayed the dangers of a new feature, which will allow traders to put up its synthetic dollar USDe as collateral when trading derivatives, which are risky bets on the prices of crypto assets.

While allowing users to underwrite their trades with yield-bearing USDe is an attractive prospect, Ethena said there is potential risk in letting traders use an asset partially backed by derivatives to place even more derivatives bets.

“We have taken this risk into account and that is why Ethena operates across more than five different sites,” said Conor Ryder, head of research at Ethena Labs. DL News.

The move comes as competition in the stablecoin sector intensifies.

In recent weeks, PayPal grown up the amount of its stablecoin PYUSD in circulation 96%, while the MakerDAO cooperative plans a rebrandingaiming to increase the supply of its DAI stablecoin to 100 billion.

US dollar growth stagnates

It comes as Ethena has lost momentum after its blockbuster launch in December.

In early July, USDe reached a record level of 3.6 billion in circulation.

That figure has now fallen by 11% to around 3.2 billion.

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New uses for USDe could boost demand for Ethena’s products.

This is where the new plan, announcement Tuesday with ByBit, one of its partner exchanges, is coming.

Ethena users create USDe by depositing Bitcoin or Ether into the protocol.

Ethena then covers these deposits with short positions – bearish bets – on the corresponding asset.

This creates a stable support for USDe, unaffected by price fluctuations in Bitcoin or Ether.

Mitigate risks

While using USDe as collateral for derivatives trading is proving popular, it is unclear what the effects will be if the cryptocurrency market experiences major fluctuations.

Using derivatives as collateral to place more bets has already had disastrous effects.

In June 2022, Lido’s liquid staking token stETH broke its peg to Ether following the fallout from the Terra collapse.

Many traders who used looping leverage to increase their stETH staking yields were liquidated, creating a cascade that caused the price of Ether to drop by more than 43%.

Ethena Labs founder Guy Young said: DL News His office and his partners have taken many precautions.

Ethena spreads bearish bets supporting the USDe across the five exchanges it partners with.

According to Ethena, 48% of short positions supporting USDe are on Binance, 23% on ByBit, 20% on OKX, 5% on Deribit, and 1% on Bitget. website.

In doing so, Ethena aims to minimize the impact of an unforeseen event on a stock market.

The same theory applies to the distribution of risks across different supporting assets.

Fifty percent of USDe is backed by Bitcoin, 30% by Ether, 11% by Ether liquid staking tokens, and 8% by Tether’s USDT stablecoin.

Previous reviews

Ethena has already been criticised regarding the risks associated with USDe.

Some have compared USDe to TerraUSD, an undercollateralized stablecoin that collapsed in 2022.

“It’s not a good design for long-term stability,” said Austin Campbell, an assistant professor at Columbia Business School. said as the USDe launch approaches.

Young replied to critics, saying the industry needs to be more diligent and careful when “marketing products to users who might not understand them as well as we do.”

Ethena has since added a disclaimer on its website stating that USDe is not the same as a fiat stablecoin like USDC or USDT.

“This means that the risks involved are inherently different,” the project says on its website.

Tim Craig is DL News DeFi correspondent based in Edinburgh. Feel free to share your tips with us at tim@dlnews.com.

Fuente

DeFi

Cryptocurrency and defi firms lost $266 million to hackers in July

Published

6 months ago

1 August, 2024

Financial Block Staff

Crypto companies, defi lost $266m to hackers in July

In July 2024, the cryptocurrency industry suffered a series of devastating attacks, resulting in losses amounting to approximately $266 million.

Blockchain Research Firm Peck Shield revealed in an X post On August 1, attacks on decentralized protocols in July reached $266 million, a 51% increase from $176 million reported in June.

The most significant breach last month involved WazirX, one of India’s largest cryptocurrency exchanges, which lost $230 million in what appears to be a highly sophisticated attack by North Korean hackers. The attack was a major blow to the stock market, leading to a break in withdrawals. Subsequently, WazirX launched a program in order to recover the funds.

Another notable incident involved Compound Finance, a decentralized lending protocol, which suffered a governance attack by a group known as the “Golden Boys,” who passed a proposal who allocated 499,000 COMP tokens – valued at $24 million – to a vault under their control.

The cross-chain liquidity aggregation protocol LI.FI also fell victim On July 16, a hack resulted in losses of $9.73 million. Additionally, Bittensor, a decentralized machine learning network, was one of the first protocols to suffer an exploit last month, lo m ing $8 million on July 3 due to an attack targeting its staking mechanism.

Meanwhile, Rho Markets, a lending protocol, suffered a $7.6 million breach. However, in an interesting twist, the exploiters research to return the stolen funds, claiming the incident was not a hack.

July 31, reports The Terra blockchain protocol was also hacked, resulting in a loss of $6.8 million across multiple cryptocurrencies. As crypto.news reported, the attack exploited a reentrancy vulnerability that had been identified a few months ago.

Dough Finance, a liquidity protocol, lost $1.8 million in Ethereum (ETH) and USD Coin (USDC) to a flash loan attack on July 12. Similarly, Minterest, a lending and borrowing protocol, saw a loss of $1.4 million due to exchange rate manipulation in one of its markets.

Decentralized staking platform MonoSwap also reported a loss of $1.3 million following an attack that allowed the perpetrators to withdraw the liquidity staked on the protocol. Finally, Delta Prime, another decentralized finance platform, suffered a $1 million breach, although $900,000 of the stolen funds was later recovered.

Fuente

DeFi

The Rise of Bitcoin DeFi: Then and Now

Published

6 months ago

1 August, 2024

Financial Block Staff

The convergence of Bitcoin’s robust security and Layer 2 scaling solutions has catalyzed the emergence of a vibrant DeFi ecosystem.

By expanding Bitcoin’s utility beyond simple peer-to-peer payments, these advancements have opened up a new frontier of financial possibilities, allowing users to participate in decentralized lending, trading, and other complex smart contract operations on Bitcoin.

Read on to learn about the rise of Bitcoin-based decentralized finance and how the space has expanded to accommodate a new generation of native assets and features.

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What is DeFi?

Decentralized finance (DeFi) represents a paradigm shift in financial services, offering internet-based financial products such as trading, lending, and borrowing through the use of decentralized public blockchains.

By implementing blockchains, smart contracts, and digital assets, DeFi protocols provide financial services through a decentralized ecosystem, where participants do not have to deal with intermediaries when transacting.

What is Bitcoin DeFi?

The inherent limitations of the Bitcoin mainchain in supporting the intricacies of decentralized finance have created the need to develop smart contract-based Layer 2 solutions.

Additionally, the advent of the Ordinals protocol in 2023, which facilitated the emergence of fungible token standards such as BRC-20 and Runes, catalyzed the growth of DeFi on the Bitcoin blockchain.

This expansion in protocol diversity has broadened the applications of the world’s leading cryptocurrency network beyond the core base-layer use cases around value preservation and transactional capabilities.

Therefore, Bitcoin DeFi has become a nascent sector within the digital asset market, after previously being a missing essential part of the Bitcoin ecosystem.

Bitcoin DeFi in its early days

Integrating decentralized finance (DeFi) concepts into the Bitcoin ecosystem has been a journey of innovation and perseverance. Early attempts to bridge the gap between Bitcoin’s fundamental simplicity and DeFi’s complexities have spawned pioneering projects that, while laying essential foundations, have also encountered significant obstacles.

Colored coins

Colored coins represented an early foray into tokenizing real-world assets on the Bitcoin blockchain. By leveraging the existing network to track ownership of assets ranging from stocks to real estate, this approach highlighted Bitcoin’s potential as a platform beyond digital currency. However, scalability and practical implementation challenges have limited its widespread adoption.

Counterpart

Building on the colored coins, Counterparty has become a platform for creating and trading digital assets, including non-fungible tokens (NFTs), on Bitcoin.

The introduction of popular projects like Rare Pepe NFTs has demonstrated the growing appeal of digital collectibles. However, constraints around user experience and network efficiency have hampered its full potential.

These early experiments, while not fully realizing their ambitions, served as valuable stepping stones, informing Bitcoin DeFi’s subsequent developments. Their challenges highlighted the need for more sophisticated infrastructure and protocols to harness the full potential of decentralized finance on the Bitcoin network.

Bitcoin DeFi Today

Today, building DeFi applications on Bitcoin is primarily done in the realm of Layer 2 (L2) networks. This architectural choice is motivated by the limitations of Bitcoin’s base layer in supporting complex programmable smart contracts.

Bitcoin’s original design prioritized security and decentralization over programmability, making it difficult to develop sophisticated DeFi protocols directly on its blockchain. However, the recent emergence of protocols like Ordinals, BRC-20, and Runes, while not DeFi in their own right, has sparked possibilities for future DeFi-like applications on the main chain.

In contrast, L2 solutions offer a scalable and programmable environment built on Bitcoin, enabling the creation of various DeFi products.

By expanding Bitcoin’s capabilities without compromising its core principles, L2s have become the preferred platform for developers looking to build DeFi applications that encompass trading, lending, staking, and more.

Leading L2 networks such as Lightning Network, Rootstock, Stacks, and Build on Bitcoin provide the infrastructure for these efforts. Some of these L2s have even introduced their own native tokens to the network, further expanding Bitcoin’s DeFi ecosystem.

Essentially, while Bitcoin’s core layer presents challenges for DeFi development, its security and decentralization have provided a foundational layer for the innovative L2 landscape to thrive.

Bitcoin Layer 2 offers a promising path to building a robust and thriving Bitcoin-based DeFi ecosystem that offers trading, staking, lending, and borrowing. All you need is a DeFi Wallet like Xverse to access the new world of decentralized financial services secured by Bitcoin.

Conclusion

The integration of DeFi principles into the Bitcoin ecosystem, primarily facilitated by Layer 2 solutions, marks a significant evolution in the digital asset landscape.

Building on the foundational work of pioneers like Colored Coins and Counterparty, the industry has evolved into more sophisticated platforms like Rootstock, Stacks, and Build on Bitcoin to create a thriving Bitcoin-powered DeFi ecosystem.