When the capital markets first opened on January 4, 2021 this year, the FT homepage focused simply on bitcoin (BTC) with the headline: “Bitcoin will surpass $ 34,000 when record rally resumes.”
Bitcoin will certainly see institutional buying at an unprecedented level in history, but what does this mean for cryptocurrency in general? How to move from institutional adoption of bitcoin or other cryptocurrency assets to linking traditional financial markets to decentralized financial and digital real estate markets? If we can achieve this noble goal, the inflow of capital, resources and interest will far exceed even the existing large DeFi room, leading to more potential.
Few institutions can invest in Bitcoin right now. The difficulty of reaching this stage should not be underestimated, and that the money invested in Bitcoin remains excessive. The largest institutional investors, such as pension and insurance funds, require highly developed and liquid markets, long historical records, and the need to overcome internal risks and compliance issues. These barriers multiply when it comes to using encryption protocols. For example, a company wishing to use digital tokens representing the company’s shares on the Ethereum blockchain must comply with applicable financial regulations and capital markets around the world. This includes aspects such as international KYC regulations and anti-money laundering across national borders.
For organizations to be able to certify DeFi, we must first allow them to access it in a compatible manner. This does not mean that all DeFi needs to be misregulated; This would remove the goal of a decentralized system. However, a protocol could be introduced to facilitate DeFi interoperability. Such a system has many aspects.
While it is easy to create a digital asset, it is difficult to set up compliance. One of the most pressing issues concerns the global regulation of securities, as there are a number of measures that must be taken prior to issuing a security, including legal advice, documentation, due diligence, marketing, secondary trading, and corporate action. All this requires additional costs.
The inexhaustible disadvantages of this process also create opportunities for DeFi. A protocol capable of solving these problems will drastically reduce the company’s capital and resource costs, while improving the process for investors who want to access and trade cryptocurrencies similar to today’s cryptocurrencies.
Due diligence control
Due diligence, including KYC and AML, is a costly and mandatory process for organizations. An investor investing in multiple companies must perform the same checks for each – a time-consuming process for all parties. It also means that the investor trusts several organizations with confidential data.
DeFi provides the ability to override how KYC is performed. Instead of each company running their own KYC business, an investor can implement Know Your Customer protocols with a certified partner. This will allow the investor to retain control over their data, while the organizations can share the burden of KYC costs with each other. Organizations will of course be able to fill their KYC operators if they don’t accept the KYC operator.
Data access and management are more controversial than ever. Two important challenges organizations face when dealing with data are the security and privacy of user data, especially GDPR, and the ability to connect to DeFi through user-friendly APIs.
User data can be protected using encryption techniques as proof of zero knowledge, allowing users to share verified data with a third party without disclosing the data to that party. This will allow investors to demonstrate that they are entitled to enter into an agreement without the need to prove their identity or the reason they are entitled. This data can be encrypted and stored securely, always remaining in the user’s hands.
Organizations also need an easy way to share data. This can be achieved through APIs that will make it easier for organizations to connect to DeFi protocols while complying with regulatory requirements such as the EU Payment Services Directive 2. This API should make it easier to transfer data inside and outside the network.
Requirements and processes differ from country to country, and penalties for non-compliance have increased dramatically since the financial crisis. Likewise, the resource burden associated with enhanced compliance monitoring has increased. At the same time, investors expect to be able to invest globally rather than being limited by their jurisdiction.