How US regulators are stymying DeFi for Americans
As the push into decentralized finance heats up after growing 12-fold last year, one strategist is warning of two existential threats to the DeFi movement.
At a recent Yahoo Finance Plus webinar, Bianco Research President Jim Bianco explained that DeFi developers have pursued efficiency and lower costs at the expense of remaining truly decentralized. He begins by breaking down what a "maximalist" means in the context of crypto.
"There's a phrase that we use in the space called a maximalist, and you've probably heard it associated with bitcoin maximalist, which quickly means bitcoin is all you need. It's perfect — or as close to perfect — as you can get. Everything else is substandard to bitcoin. Just invest in bitcoin and go no further. There's a theory of maximalist [as it pertains to] ethereum. Ultimately, I do think that either maximalism is a very bad idea. It is a very limiting idea as well, too," said Bianco, who does not consider himself a bitcoin (BTC-USD) or ethereum (ETH-USD) maximalist.
Bianco then outlined what he calls "decentralized maximalism" and why it's necessary in the crypto space to achieve its long-term potential. He also identified a trend toward centralization in the DeFi space — which on its face seems counterintuitive, but emerged for reasons of economy to save money and time.
"[T]roughout 2021, what we found with ethereum ... is that it became so popular, especially with NFTs — non-fungible tokens really started to take off in popularity — that the network got overwhelmed. And that transaction costs known as gas fees took off through the roof," he says.
Developers responded by turning to cheaper alternatives on other ethereum-like "layer one" networks, such as solana (SOL-USD), cardano (ADA-USD), and polkadot (DOT-USD). These networks have been able to drastically drop gas fees, notes Bianco.
"[T]hey found very, very low gas fees or transaction costs — in some cases less than a penny. And they've exploded in value. But how did they achieve that? They achieve that by getting higher throughput transactions per second," he says. "And how do they get the higher throughput? They're centralized?"
Bianco hammers this point, emphasizing the inherent problem of turning toward centralized blockchains, and why it's important from a regulatory point of view to be decentralized.
"Decentralized means it is an autonomous program that no one controls. No one could come in and stop it or start an alternate without being done in a very, very public way," Bianco explains. "No regulator could come in and tap somebody on the shoulder and say, We don't like this activity, make it go away. I don't control it. In a centralized world, they do — you can control it."
SEC tells Coinbase 'no'
Part of the growing popularity and appeal of DeFi is gaining the ability to pay interest on the nearly $2 trillion in crypto assets. While the practice is gaining traction throughout much of the world, U.S. regulators have hit the brakes.
Last year, Coinbase notified the SEC of its intent to offer 4% interest on customer crypto holdings. The SEC said that type of offering constitutes a security akin to what traditional brokers offer their clients. Such interest-bearing products, which have to be registered with the SEC in a costly and potentially lengthy approval process, have underwriters like JPMorgan and Goldman Sachs, as well as custodians like Bank of New York Mellon. Inserting traditional Wall Street players into the DeFi mix seems at odds with its mantra of cutting out the middleman and also with the term "decentralized" itself.
An intransigent and sclerotic SEC is harming U.S. investors as DeFi gains steam around the world, says Bianco, citing crypto research firm Chainanalysis, which gathers statistics on crypto adoption by country — looking at the number of people who have adopted crypto as a percentage of the population and GDP.
He notes that the only developed country on the list's top 20 is the U.S., and that adoption is exploding in the Philippines, Vietnam, Nigeria, the Middle East, Africa, and Central America.
Bianco argues that the juggernaut of decentralized finance is unavoidable, so U.S. regulators shouldn't lock out Americans from the potential benefits while disincentivizing DeFi development in the U.S.
"[W]e'll sit that out, and we'll probably lose badly on it. Or we could recognize this is going to happen one way or the other, and get a seat at the table and start helping to create the new financial system," he says.
Holding out hope for ethereum
For Bianco, the crux of the matter is the existential question of whether a watered-down version of DeFi is even valuable.
"[I]t's gotten us into a philosophical debate ... [I]f we don't get to decentralization, are we really going to invent anything new [or are we] just going to invent a digital version of the same thing that we have right now?"
Bianco has his sights on the expected deployment of ethereum 2.0 in the first half of this year. It's a massive change that will transition the network from proof of work to proof of stake.
"[I]f we get there, we can see both decentralization [as well as] this hope that we have a new system," he says. "Otherwise, we're just reinventing the same wheel."
Jared Blikre is an anchor and reporter focused on the markets on Yahoo Finance Live. Follow him @SPYJared. Devan Burris is a producer for Yahoo Finance Live.
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