Institutional investors undeterred by the SEC crackdown

By Mona El Isa, founder and CEO at Avantgarde

The dust is beginning to settle in the US after the Securities and Exchange Commission (SEC) announced lawsuits against cryptocurrency exchanges Binance and Coinbase. We’re now left wondering, what happens next?

Despite the potential negative ramifications, the news appears to not have curtailed interest in digital assets, and has actually sparked action within the institutional investment world. Established traditional finance players appear to be stepping into the breach, with BlackRock, Fidelity and Schwab all recently announcing applications for exchange-traded funds in the crypto space.

Decentralised future

BlackRock, the world's biggest asset manager, filed for a Bitcoin exchange-traded fund that would allow investors to get exposure to cryptocurrency, as the asset class comes under intense regulatory scrutiny. Despite being rejected by the SEC, this move signalled a major pivot in the direction of travel for large institutional players.

It seems somewhat inevitable that a Bitcoin ETF will eventually be approved. The question, then, will be around the approach that these traditional finance institutions take. Since these companies are built on centralised financial rails, the expectation is that these ETFs will be centralised offerings. However, interest in decentralised finance is growing, and there is room for traditional players to offer their customers a more diverse array of on-chain crypto products.

The appeal of DeFi is being able to access all the typical financial needs (for example, exchange, lending, borrowing, investment products) whilst remaining in custody of your assets the whole time, eliminating counterparty risk and having real time auditable 24/7 transparency.

On-chain DeFi protocols have matured significantly over the last few years and can prevent the misappropriation of funds and provide much needed transparency, unlike centralised models as we saw with the collapse of FTX. By using purpose built blockchain based technology, investors benefit from auditable transparency, automated risk management and control through smart contracts.

Shift from CeFi to DeFi? 

The SEC's lawsuit against Binance and its eagerness to order the freezing of assets signifies a pivotal moment in the cryptocurrency industry. It has created a growing tension from investors on centralised platforms who - until now - have trusted that they are able to access their assets whenever they want to. FTX, Celsius, 3AC and many other centralised models broke that trust.

Earlier this year, Signature Bank was bailed out on the condition that they ceased to provide banking services to crypto companies. This incident would have also left a number of companies - many of which were innovative start-ups - unable to access fiat currencies.

Early evidence suggests that these incidents are expected to increase the appeal of self-custodial digital asset options and DeFi in the long run. This was demonstrated by increased trading volumes on decentralised exchanges, an 88% jump in transactions on decentralised exchanges in the 24 hours after the SEC announcement. Additionally, on-chain analytics firm Dune, reported that the month of May saw 778,000 users across various DeFi platforms, a figure last seen at the apex of the bull market phase in 2021, with the upward trend reflecting growing trust in decentralised platforms. 

The SEC lawsuit serves as a reminder that centralised platforms are more susceptible to decisions made by higher powers, to misappropriate or freeze assets without any ruling of wrongdoing. In contrast, DeFi platforms are resilient to these attacks as risk management practices such as smart contracts are enforced by the blockchain. Furthermore, they are not susceptible to any central points of failure and users are in custody of their own assets at all times.

The benefits offered by DeFi, such as greater transparency, risk management and increased accessibility, make it a more attractive alternative for modern finance. As more users become aware of the advantages of DeFi, they are likely to explore and adopt a decentralised approach.

Early indications suggest the response to the SEC’s aggressive actions are not what the government agency had hoped. Inadvertently, they have started a chain reaction, which may lead to a domino effect towards self-custodial, decentralised alternatives.