Cryptocurrency and Decentralized Finance (DeFi) were created to provide millions of unbanked people with access to the financial system, to seamlessly transform personal finances and bring more value back to investors by removing intermediaries and offering stable returns that can exceed traditional savings accounts. This is exactly what many DeFi companies seemed to be doing before the recent period of market turmoil or “crypto winter”. However, when the market froze, it became clear that some companies were only able to offer these very high returns by putting client assets at risk.
These companies were taking excessive risks with people’s assets and in many cases clients were not given clear information about how their assets were being managed. At the peak of crypto in November 2021, the now bankrupt cryptocurrency lending company Celsius was offering up to 17% annual returns on deposits. But, contrary to their “get out of the bank” slogan, involving bank-level asset protections, buried in the fine print of their terms and conditions, he said crypto was a high-risk asset and he didn’t. provided no details on how customers’ returns were generated. Unsurprisingly, it was not safe for customers. As the value of crypto declined, Celsius and other companies that took excessive risks collapsed, causing consumers to lose money and trust.
Despite the winter chill, the industry has retained its potential to positively influence personal finances and can use blockchain technology to do so seamlessly. The sector must capitalize on this potential, but correctly this time – it will only be achieved if the whole industry, and not a few good players, changes its behaviors and practices to be more transparent and professional, and better protect its consumers. .
Make transparency and professionalism the industry standard
To ensure crypto can build a better financial system, it must learn from traditional banking. The first step is honesty about how the system works. Cryptocurrency markets remarkably resemble the business cycle of a conventional economy, up and down. In crypto, on the other hand, the trend is deepening – the average crypto bear market sees an 85% drop as the stock market only drops 36% on average. The sector must make it clear that there are both good times and bad times. As a bonus, the inherent transparency of blockchain technology can make it easier to assess the market and identify risk bubbles compared to traditional finance – a key advantage that is not yet being used effectively.
Celsius has demonstrated that there are serious issues with allowing crypto firms to generate returns for customers without providing insight into what is going on behind the scenes. As such, crypto companies must be completely upfront about their business and provide clients with clear information on their platforms about how interest is earned, how risk is managed, and how crypto can be traded. integrated into a diversified portfolio of assets. It’s something we’ve always done in our crypto investment and return app, AQRU, because it’s not only the right thing to do, but it reinvigorates trust in the industry, protects consumers, and professionalizes crypto. In the longer term, this will be one of the factors that will help align the sector with the traditional financial system, instead of pretending it is a replacement – or worse, a get-rich-quick scheme. – and to ensure that the next crypto cycle is led by companies offering unparalleled levels of transparency.
Put in place sensible regulations
Along with becoming more transparent and professional, the crypto industry needs to be wisely regulated. The complicated nature of crypto has previously allowed experienced players to take advantage of new investors in the industry through fraudulent NFT schemes, front-running, back-running, poor execution… The industry has already given regulators all the reasons they need to over-regulate space. This must stop. If we want to increase crypto adoption, we need a safe space for new market players to get involved, and we need regulators to help create that space without stifling innovation.
Sensible regulation implemented following extensive discussions with industry experts and companies could usher in the next crypto boom. And this is already verified, with Bloomberg reporting in October that the more aggressively the US SEC investigates and punishes bad actors in the space, the more consumers are likely to invest. Regulation and enforcement make consumers feel protected, which builds trust. It is this trust that is needed if crypto is to transform personal finances.
Crypto used to transform the personal finances of its users by helping them outrun inflation and make up for declining incomes. There’s no reason the industry can’t be that positive influence on consumers again, but this time it has to do it right. By making the sector more transparent and implementing sensible regulation to maintain it, crypto and DeFi can be a more inclusive helping hand for people across a range of financial backgrounds and backgrounds.
Phil Blows is the CEO of READ IT.
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