Author: Hugo Lee, CEO of Haru Invest
As we barrel towards 2023, crypto is facing a growing but unnecessary battle inside its own walls, as CeFi has taken a reputational hit this year alongside the collapse of some of its highest-profile companies.
Their collective downfall has brought about a wave of uncertainty suggesting this may be the end of the road for CeFi and the start of a DeFi wave. “Crypto Isn't Dead - But CeFi Might Be” read a recent headline in Benzinga, “Crypto Users Jump to DeFi Platforms in Wake of FTX’s CeFi Crash,” blared The Defiant last month.
This zero-sum way of thinking in which there is only one winner is not only misguided and wrong but also harmful to the collective health of our still-nascent industry. CeFi and DeFi can grow and live harmoniously. In fact, they should if we’re to reach mass adoption of crypto financial products. Here’s why.
CeFi Is Not to Blame
Much is yet to unravel around why firms like Celsius, FTX, and BlockFi fell so abruptly, but their centralized nature is not to blame.
Traditional financial companies, including banks, have been operating as a centralized ecosystem for centuries and rarely go under. Satoshi invented Bitcoin and the idea of blockchains to disrupt traditional finance, but Satoshi’s battle was with the level of control centralized banks have, not with any perceived instability in its model.
So why did these CeFi crypto businesses fail?
First, they took advantage of loopholes that have yet to be closed by regulators who are still sorting out how to protect and regulate a young and fast-growing industry being created in front of our eyes. Second, they engaged in shady business practices — some illegal, some simply unethical, that took advantage of these loopholes.
Repairing CeFi’s Image
The size, scale, and media coverage of this year’s CeFi collapse have taken a toll on the surviving CeFi companies, like us at Haru Invest.
In such a situation, we must separate ourselves from such businesses and their reckless practices that have caused users’ trust to wane and work to repair that fractured trust. This begins and ends with transparent, frequent, and ongoing communication with your users. Was your business exposed to a collapsed company in any way? “No” is just as important for your users to hear as “yes” and be sure to update users as contagion continues to spread across the crypto ecosystem.
Also be transparent and clear about how your business operates to address users taking increased interest in what happens to their funds on your platform. Articulate it clearly, in plain language, and across multiple channels. Consider hosting AMAs and/or Twitter chats with key executives to clarify and expand in more color anything you need to communicate, including your ongoing commitment to security and any conversations with regulators across applicable countries, as we do at Haru Invest.
DeFi and CeFi: Living in Harmony
DeFi, of course, offers benefits CeFi cannot, the biggest being its decentralized structure and transparency. In DeFi, investments are based on a smart contract, and investors can see the flow of all their crypto assets. This unique level of transparency with DeFi is appealing to investors for many obvious reasons.
However, just like CeFi, upsides come with downsides. DeFi is burdened with high fees required to maintain the system, reward systems that leverage the platform’s own native tokens, cybersecurity issues like hacking, and a less clear accountability structure resulting from its intended decentralized nature.
Neither CeFi nor DeFi is a “better” investment tool than the other. Both have their pros and their cons, and it’s reckless to consider a few bad CeFi apples as a bellwether for the entire centralized finance market. Both play for the same team and are after the same goals; fighting the weight of traditional banks cannot be accomplished by one without the other. Therefore, I believe this is not the end for CeFi, and for true mass adoption of crypto finance to occur, CeFi and DeFi must grow in harmony.
This post is commissioned by Haru Invest and does not serve as a testimonial or endorsement by The Block. This post is for informational purposes only and should not be relied upon as a basis for investment, tax, legal or other advice. You should conduct your own research and consult independent counsel and advisors on the matters discussed within this post. Past performance of any asset is not indicative of future results.
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