DeFi
Wall Street’s DeFi land grab means less anonymity, more identity checks – DL News
- Wall Street cannot use DeFi protocols without knowing who its counterparty is.
- This will lead to more protocols implementing identity checks.
- A new hybrid model – partly centralized, partly decentralized – could emerge.
Wall Street is getting into crypto. And that will likely mean the end of DeFi as we know it.
“A lot of institutions are actually fascinated by DeFi,” said Darius Tabai, co-founder of Vertex. DL News. “The problem is that DeFi is still in Wild West mode.”
DeFi allows anyone, anywhere to carry out complex financial transactions – for example, taking out a loan on Ethereum via the MakerDAO lending protocol – without needing to show identification.
And since these protocols are lines of code rather than companies with an office, there’s no one to send this identification to anyway.
This is a big problem on Wall Street, where companies are legally required to assess counterparty risk, meaning who is on the other side of the transaction.
A former global head of metals trading at Merrill Lynch and Credit Suisse, Tabai said most institutions would not be able to use protocols that do not require identification.
The solution?
“It’s been clear to people for some time that there will be a next generation of DeFi platforms that are permissioned in one way or another,” he said.
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Hybrid models
Crypto projects generally fall into one of two categories: centralized or decentralized.
Centralized platforms, like Binance or Circle, operate like businesses and require identity checks.
But decentralized protocols, like Uniswap or Tornado Cash, are open source software driven by their communities – at least in theory – that anyone can use without providing information about themselves.
These two categories will likely converge into a hybrid that takes advantage of the security provided by blockchain technology while retaining the efficiency and identity controls of centralized models, Tabai said.
Concrete example: Vertex, a perpetual The exchange he co-founded executes transactions off-chain, like a centralized company, but records all transactions on-chain, like a decentralized protocol.
And while it doesn’t yet have KYC or know-your-customer controls in place, the team uses third-party monitoring services like Chainanalysis to flag high-risk wallet addresses.
Vertex is not the only protocol to organize itself this way.
Cube.exchange, a trading platform launched in December, has already implemented KYC controls. But users can track where their funds are in real time, just like when using a decentralized platform.
Cube’s hybrid design prevents the team from misappropriating customer funds or hackers from siphoning them off.
These issues have plagued crypto since the demise of Mount Gox in 2014, and they came back to the forefront when FTX collapsed in 2022.
“Hybrid models solve a number of problems that have easily attracted criticism and provide a much superior experience to centralized and decentralized exchanges,” said Bartosz Lipiński, co-founder and CEO of Cube. DL News.
Evolution
For Tabai, this model will only become more widespread.
“Some of TradFi’s standards are going to start to apply to crypto,” he said. This includes KYC checks, which Tabai says were not ubiquitous just five years ago.
“Now all centralized exchanges do these checks,” Tabai said. “It makes sense that on some level, DeFi will likely do the same.”
Lipiński, meanwhile, said “many” decentralized exchanges already carry out identity checks to comply with anti-money laundering rules.
And that could be enough for Wall Street to start using these platforms once regulatory uncertainty around crypto dissipates, he said.
“It’s not a new idea,” Tabai said. “It’s just an idea that’s being refreshed.”
Tom Carreras is markets correspondent for DL News. Do you have a tip on Wall Street and DeFi? Contact us at tcarreras@dlnews.com