Many people have been amazed by the growth of the digital asset industry in the last couple of years with the total market cap of digital assets increasing from approximately US$230Billion in January 2020 to US$2.2 Trillion in January 2022. Sectors such as Decentralized Finance (DeFi) and None-Fungible Tokens (NFTs) have also seen massive growth in this period with DeFi total value locked increasing from US$10Billion to US$96 Billion over the same period.
This is, however, very small compared to the total market capitalization of the U.S. stock market at $53,366,436.4 million (Dec 31st, 2021) and individual companies such as Apple with market caps of US$3 Trillion.
The question therefore becomes: How do we ensure that the digital asset industry keeps growing and gives investors the more options to invest their funds safely?
As the industry grows, and more mainstream investors enter the market, it is important to ensure that there are guardrails in place to not only protect investors, but also keep regulators happy.
Regulations have been a hot topic in the last few years and most of the regulatory concerns were around Anti Money Laundering (AML) and Counter Terrorist Financing (CFT). This can be seen in the Financial Action Task Force’s (FATF) focus on AML guidance as well as the US Securities and Exchange Commission’s (SEC) focus on unregulated securities offerings. As regulators begin to better understand the digital asset space, regulations can also adapt and evolve.
For the digital asset industry to grow and start competing against the traditional financial industry, it must embrace compliance in a practical manner working with individuals who understand both the traditional financial industry as well as the future of finance. This includes putting in place AML policies and ensuring protocols are as compliant as possible in the industry.
One easy example is Decentralized Autonomous Organizations (DAOs) and their treasuring, which regularly issues grants to different teams building on their protocol. DAO’s should ensure that they are performing the necessary background checks before transferring any tokens to a team that was awarded a grant to ensure they are not transferring tokens to any unwanted parties.
We have already seen certain DeFi protocols like Aave launch permissioned pools to help traditional financial institutions enter the space in a regulatory-compliant way. Users of Aave Arc must perform due-diligence procedures such as Know Your Customer/ Anti-Money Laundering (KYC/AML) to gain access to the pools. This gives institutions the peace of mind that they can trade in the DeFi industry without getting in trouble with regulators and can be a massive source of liquidity flowing into the industry.
For the digital asset industry to start truly competing against the traditional financial industry, it will have to embrace compliance. Technology provides new innovative solutions and there may be many ways investors can meet KYC/AML requirements in a much more streamlined process than in the traditional financial industry.
In future, we will likely see many more protocols opening permissioned pools and it is likely that there will be split pools in many protocols – where some users choose to trade in the Non-KYC pool and other investors, who have regulatory requirements, trade in the permissioned KYC pool. This is part of a growing and evolving, and is healthy for the development of the entire digital asset industry.
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