Regulate the Last Mile into the Decentralized World

Regulate the Last Mile into the Decentralized World

The collapse of virtual asset trading platforms broke out one after another. Following the collapse of LUNA and UST, the US dollar-pegged stablecoin issued by the Terra Blockchain ecosystem in May 2022. FTX, another trading platform, went bankrupt recently, and AAX, a

cryptocurrency

exchange in Hong Kong, etc. BlockFi, which is closely related to FTX, Also formally filed for bankruptcy protection in the United States court. The underlying causes of these mishaps are the same: the regulation of virtual asset trading and the lack of security for small investors.

Cryptocurrency platform: Bankruptcy, lack of transparency

How to effectively supervise the virtual asset market is undoubtedly the key to developing the virtual currency market. The collapse of the virtual currency trading platform is not due to blockchain technology itself. The decentralization of blockchain (that is, the so-called Web3.0 by many people) theoretically has the advantage that it can directly return the value to the users and suppliers in the network through decentralization and reduce the participation of third parties and profit sharing, to improve the efficiency and market transparency. The concept of a decentralized system is real, but it's not what led to the collapse of virtual asset trading platforms.

Instead, the FTX debacle shows the operational integrity issues behind the platform managers and the transparency issue behind the deals. The role and identity of the trading platform manager are like that of a trustee.

When the client (i.e., the customer) deposits the assets or funds to the platform manager, the platform manager should manage or deal with the trust assets by the legal principles of trust; In the absence of effective supervision, the protection of investors is often lost if the platform management violates regulations and goes wrong.

In the past, such problems have occurred in the stock market or financial institutions. After the authorities strengthened the supervision of the securities market and blocked the loopholes, the occurrence of accidents was mostly controlled, and the interests of small investors were fully guaranteed. Arguably, similar problems have existed in traditional asset trading markets for a long time. Some of the differences today are that assets such as securities are tangible entities, while today's virtual currencies or assets are literally “virtual”, putting regulation design to a new test.

The problem with the critical and necessary regulation of virtual currency exchanges or proxies is that many people intuitively believe that “decentralized” applications such as virtual currencies or blockchain products do not need third-party regulation. Should this be the case？

On a deeper level, with the decentralized application of blockchain, most people in society have not been able to directly participate in the decentralized world itself; In fact, not most people can master the decentralization technology of blockchain, which is not common life knowledge. Moreover, the technical requirements of decentralization trading are robust, and direct participation in it, such as directly accessing the blockchain trading platform through programming and trading with other users on the blockchain, requires very high programming technology and understanding. More than 90% of the people in the world do not know how to program themselves, directly deal with blockchain, and participate in the decentralized world of blockchain.

At present, ordinary people enter this decentralized application operation through an intermediary. Through this intermediary “agent”, they participate in the trading of virtual currency exchanges managed by the agent. However, this agency process is entirely a centralized, traditional commercial transaction without the so-called concept of decentralization.

Agency affects property security.

Data shows that if people think decentralization means no regulation and users can buy and sell freely, they are wrong. Investors buy and sell virtual currencies through intermediaries, or trading platform managers, rather than directly into the decentralized blockchain world.

The author calls this part of the road from individual users to virtual currency exchanges and then into the decentralized world of blockchain the “last mile road”, which is also a centralized road. In the “vacuum” of the “last mile road”, the answer is yes. The author believes supervision is necessary because the quality of agents, including their professional ethics, will inevitably affect the security of clients' property. There is enough transparency behind transactions to affect client and market confidence.

A series of accidents, including LUNA and its sister UST and their eventual collapse, were not caused by blockchain technology but by the quality and strategy of the platform management, as well as the application of some existing (improper or failed) financial transaction concepts to the decentralized world of a blockchain platform. It makes people think it's a decentralized new product.

It can be seen that some financial products under the “signboard” of decentralization are some old and traditional financial transaction concepts, which are just “packaged” to be bought and sold on the blockchain platform, making ordinary people mistakenly think that they are new financial things.

The FTX debacle revealed regulatory failings that could have happened to any securities firm in the past, such as the misappropriation of client funds and improper manipulation of client assets. Such accidents are rare at securities firms today simply because the government has effectively regulated the securities industry so that casualties are kept to a minimum, and small investors are given the protection they deserve.

It is misleading to think that a decentralized world does not need regulation. On the way to the “vacuum” of the “last mile” into a genuinely decentralized world, the lack of effective regulation and the series of accidents that have caused the collapse of virtual currency exchanges is enough to cause the government to seriously consider effective regulation of the operation of these virtual asset exchanges.

Regulated business operations and effective policies can protect investors

Of course, this raises an important question: How to regulate？ For traditional financial institutions such as banks or securities banks, their client assets are “real assets” such as funds or securities, which are easily legally defined with relatively clear standards and thus set relatively straightforward regulations and supervision. However, so far, the regulatory authorities of many countries have yet to have a clear concept of the supervision of virtual asset transactions. Precise definitions of virtual assets and even exchanges must be made more accessible.

Remember that the Monetary Authority of Singapore issued a Proposed Regulatory Measures for Digital Payment Token Services in late October that proposed tighter regulation of cryptocurrencies, including a ban on retail lending, To allow them to conduct cryptocurrency transactions, require local operators of virtual crypto assets to separate corporate and client support, and restrict local stablecoin issuance, to protect investors.

To sum up, it is necessary to strengthen the regulation of virtual asset trading, standardize operators and provide adequate investor policy protection. There is still a “last mile” blank area for the real decentralized world, and the government must regulate the virtual asset trading market effectively. And the answer is also apparent.