Concordium aims to transform global business migration to blockchain by offering a reliable public blockchain with the advantages of a private chain (DeFi and TradFi).
A New Combination of Blockchain Technology
Currently, the financial sector is focused on exploring the world of cryptocurrencies and blockchain technology, examining the opportunities and challenges to prepare for a complete transformation of the global economy. The annual meeting of the World Economic Forum in Davos in 2023 also addressed topics including decentralized finance and emphasized the importance of timely decision-making when drafting future economic programs. While perspectives are changing, distributed ledger technology (DLT) could have a revolutionary impact in the future; however, the challenge lies in whether the current financial system is ready for these changes and what approach should be taken regarding regulations and consumer protection in the decentralized financial space.
The most pressing question is: what lessons have been learned from 2023, and how will traditional finance (TradFi) and decentralized finance (DeFi) find their roles in the future global financial system?
In this article, which summarizes a comprehensive report on DeFi by Concordium, we will address these questions and explain the changing perspectives in TradFi and DeFi.
The Speed of Disruption is Increasing
Key factors affecting the growth of companies include an inability to innovate and resistance to technological pressures, alongside startups drawing inspiration from creativity. In the digital transformation era, companies must embrace new technologies and stay ahead of their competitors. The average lifespan of companies at their peak performance is rapidly declining, with predictions suggesting that by 2027, 75% of the current companies in the S&P 500 will cease to exist. The inability to rejuvenate and resist competitors has a disruptive impact on company growth. To advance in the era of technology, companies must focus on innovation and explore new technologies, joining the technological revolution of Web 3.0. Reputable companies like Google, Amazon, Netflix, Meta, Apple, and Sony exemplify successful firms that consistently stay ahead of their rivals through technology and innovation.
The Current State of Traditional Finance (TradFi)
During the 2008 global financial crisis, opacity, complexity, and a destructive balance between profit and risk persisted. Private sector incentives led to increased risk-taking, creating favorable conditions for speculation during periods of positive growth and market stability. After the financial sector’s collapse, central banks worldwide prioritized stability and improvement. However, this process has strengthened the power of central banks while reducing public trust in them. This situation has been a precursor to issues that led to challenges, such as the risks stemming from the Credit Suisse crisis in March 2023. This raises the question: have we learned from past experiences or need new, more innovative models?
Challenges Facing the Financial Sector
A report from the World Bank indicates that 1.4 billion people worldwide lack bank accounts, significantly hindering their progress and isolating them from others. The lack of access to banking accounts results in the loss of opportunities like access to credit, insurance protection, loans, savings, and bill payments. Data shows that 50% of the population in the MENA region (Middle East and North Africa) is financially excluded. If financial inclusion is widely implemented, it can help achieve personal financial independence and accelerate the exit of countries from poverty. In countries like Kenya and Tanzania, digital financial services have contributed to poverty reduction and demonstrated improved economic performance. It is anticipated that the development of digital financing will lead to increased GDP and job creation in emerging economies.
A Paradigm Shift
Decentralized financial systems or DeFi enhance financial services’ security, privacy, and transparency through blockchain technology. These innovations have democratized access to financial services and promoted economic innovation, though there remains a need to improve decentralized financial systems. The DeFi space is rapidly growing, offering innovative products and services to transform the global financial structure. Using distributed ledger technology and artificial intelligence improves efficiency, transparency, and interaction compared to traditional systems, reducing inefficiencies and costs while creating an appealing vision for the economic future.
The Web 3.0 domain anticipates a decentralized and fair internet, providing increased security, privacy, and transparency through blockchain technology. DeFi applications are rapidly growing within this vast ecosystem, with their goals including creating an environment free from dependence on traditional financial institutions, reducing costs, and attracting institutional players and greater investment. With wealthy investors and major companies entering this space, maintaining privacy and compliance with strict standards is paramount. For DeFi to grow and facilitate the entry of traditional financial institutions, trust, transparency, and precise accounting are crucial. Soon, building robust infrastructures and promoting trust and innovation will contribute to more meaningful transformations in this space.
Key Advantages of Blockchain and DeFi
Blockchain is all about secure data, accurate record-keeping, easy and instantaneous ownership transfer, and, most importantly, trust. DeFi is just one of many applications benefiting from blockchain technology. Its key advantages include ensuring users maintain control over their assets, real-time value transfer, and secure, transparent transactions.
Key Advantages of Blockchain Technology
- Decentralized Structure
- Automatic Ownership
- No Permission Required
- Trust and Transparency
- Security and Privacy
- Self-Sufficient Infrastructure
- Open Source Code and Accessibility
- Immutable
- Traceable and Verifiable Data
Elimination of Intermediaries
The essence of blockchain technology lies in its secure and reliable data management. This technology enables secure data storage, reliable information recording, and seamless ownership transfer. Blockchain strengthens a transparent trust system without intermediaries, decentralized records, instantaneous and error-free transactions, and efficient processes. When well-designed, blockchain integrates data publicly, securely, and immutably, transforming the tracing of trust and ownership. Unlike the diminishing trust in centralized systems, blockchains are public, decentralized, and resistant to corruption, making them impartial. DeFi is just one of many applications leveraging blockchain’s potential in finance.
Key Advantages of DeFi (DeFi) Over TradFi
- Reducing Barriers to Entry
- Maintaining user control over assets
- Real-time value transfer and cheaper settlement
- More opportunities for financial innovation and global integration
- Transactions are secure, transparent, and conducted in real time
- Increased interoperability between various financial services
- Reduction in overhead and processing costs
- Elimination of inefficiencies in open-source protocols
- Simple solutions that are inherently frictionless
- Low exchange fees
- Smart contracts operate automatically
- Auditable and tamper-proof data
Defi: A Completely New World
Scaling DeFi with autonomous identification is ready for adaptation
To harness the potential of blockchain in decentralized finance, the industry needs to implement regulatory measures similar to those in traditional finance. These actions are vital for the collaboration and institutionalization of DeFi. DeFi solutions utilize blockchain technology to create new opportunities across various applications. Implementing a blockchain-based identity layer in the Web 3.0 financial domain is essential, especially in financial operations. This independent ID framework provides compliance with KYC (Know Your Customer), privacy protection, cybersecurity, and risk control. With a protocol-level identity layer, this permissionless blockchain automates user identity verification, enhancing efficiency and reducing costs. The compliance-ready identity framework also facilitates the development of regulatory-compliant applications in the DeFi ecosystem, lowering barriers for businesses.
Legal Transparency: The Key to Regulatory-Ready DeFi
Decentralized finance is advancing toward becoming a new and improved global financial paradigm. However, for this sector to succeed in attracting attention, it must focus on security and, more importantly, embrace regulation. A fair and locked-in regulatory outlook can greatly benefit the DeFi space, and the industry should take an active approach toward compliance and legal transparency.
For instance, following a July 2023 ruling by Judge Analisa Torres that classified Ripple’s cryptocurrency assets as “not necessarily a security,” the price of Ripple increased by approximately 30% against the U.S. dollar. Shortly after, a similar occurrence occurred when cryptocurrency stocks rose over 10% in response to the U.S. Court of Appeals criticizing the SEC’s flawed reasoning in rejecting a Bitcoin Exchange-Traded Fund (ETF).
Legal transparency is key to institutionalizing DeFi and will lead to widespread adoption. The lack of consumer protection has hindered the progress of DeFi, but a more precise regulatory framework will foster growth in this sector and lead to more exciting innovations.
Key Regulatory Benefits in the DeFi Space
- Potential for experimentation, providing new products and services
- Increased transparency, reduced uncertainty
- Protection of users, prevention of market manipulation, and enhancement of financial stability in DeFi
- The prevalence of rug pulls, and other scams in the crypto space underscores the need for regulation
- Broader acceptance and trust
- The ability to enhance efficiency
- Higher liquidity
Regulatory outlook
Regulative neglect has become a significant concern in the realm of blockchain technology and the impact of Web 3.0 on the financial sector. Blockchain is poised to transform the financial structure and the global economy. Traditional and decentralized finance continue to integrate, requiring specific considerations for wider adoption.
The year 2023 has seen vital advancements in several regulatory frameworks with far-reaching implications for the cryptocurrency and financial sectors. Significant bills reflecting lawmakers’ concerns about money laundering and consumer protection have paved the way for clearer regulation in the coming years.
Developments in the DeFi space have been met with either enthusiasm or opposition. The future of cryptocurrency laws will continue to move toward greater clarity, legal protections, and decisions that shape the financial industry. This journey involves regulating digital assets, stablecoins, cryptocurrency ATMs, and DeFi’s need to ensure compliance with KYC through identity-focused measures. The path toward a global regulatory framework is expected to bring more surprises, and attention should be given to the key policy milestones of 2023.
Digital Assets Markets Regulation (MiCA)
“MiCA regulations put the European Union at the forefront of the token economy with 10,000 cryptocurrency assets. Consumers are protected from fraud and scams, and the sector affected by the FTX exchange collapse can regain its trust. Consumers will have access to all the information they need, and all fundamental risks concerning cryptocurrencies must be overseen. We considered investors’ disclosure of environmental impacts in crypto assets. This regulation brings a competitive advantage to the European Union. The European digital assets industry lacks regulatory clarity in countries like the United States.” — Stefan Berger, German Member of the European Parliament
“Currently, illicit flows in cryptocurrency are rapidly moving around the world and with a high likelihood of never being detected. The rewrite of the Transfer Fund Regulation (TFR) requires crypto asset service providers to identify and halt criminal crypto flows. Also, it ensures that all categories of cryptocurrency firms are subject to the full set of anti-money laundering obligations. This closes a significant gap in our AML (anti-money laundering) framework and implements the most ambitious Travel Rule in the world, fully compliant with international standards in the European Union, which has been adopted so far.” — Ernest Urtasun, Spanish Member of the European Parliament and joint reporter on economic and monetary affairs regarding the transfer of crypto assets
Responsible Financial Innovation Act (RFIA)
The Responsible Financial Innovation Act, introduced in July 2023 by Senators Cynthia Lummis and Kirsten Gillibrand, is a bipartisan regulatory framework for digital assets. This law emphasizes consumer protection in the cryptocurrency industry and addresses the evolution in response to the cryptocurrency industry’s bankruptcy crisis of 2022. RFIA includes regulations for intermediaries and issuers of crypto assets, focusing on combating illegal financing, updating the tax code, creating market integrity, and differentiating between various commissions.
Crypto Asset National Security Enhancement Act (CANSEE)
The Crypto Asset National Security Enhancement Act, presented in July 2023 by U.S. senators from both parties, aims to address privacy issues and combat money laundering in the decentralized finance sector. This law proposes that DeFi service providers adhere to the same anti-money laundering obligations as traditional financial institutions, including banks, brokerage firms, casinos, grocery stores, and centralized trading platforms. Critics argue that the bill’s focus on anti-money laundering ignores the reality that virtual assets are used less than traditional fiat currencies for money laundering and emphasizes the need for increased financial privacy protections beyond DeFi.
Transparency for Stablecoin Payments Act
The Transparency for Stablecoin Payments Act, approved by the U.S. House Financial Services Committee on July 27, 2023, provides a regulatory framework for payment stablecoins. This law emphasizes enhancing the self-custody of digital assets, regulatory practices for stablecoin issuers, and protecting consumer rights. It also offers comprehensive regulations for digital assets, cooperation with international regulatory bodies, and anti-money laundering measures. This legislation, presented by Patrick McHenry, Chair of the House Financial Services Committee, highlights the importance of clear regulation and consumer protection to facilitate the use of stablecoins in the 21st-century payment system.
Concordium Blockchain Company
Concordium aims to transform global business migration to blockchain by offering a reliable public blockchain with the advantages of a private chain. The company’s ecosystem, Concordex, features the first regulatory-ready decentralized exchange (DEX) accessible to all investor levels. Concordium uses its Layer 1 blockchain based on environmental accountability and privacy principles, focusing on compliance and decentralization to provide blockchain technology for global businesses with secure and low-cost transactions. This company empowers individuals and businesses to confidently navigate the Web 3.0, enhancing access, privacy, efficiency, and security in the decentralized financial ecosystem. Concordex ensures access, ownership, and security for institutional investors, making it one of the world’s most regulatory-ready blockchains.
Key Benefits
Verifiable Credentials, Selective Sharing
In a decentralized context, the safest and most efficient identity verification process integrates Concordium’s verifiable credentials to ensure compliance with legal requirements, enhances privacy, and significantly reduces the risk of identity theft and fraud.
Supported Transactions
Allows users to interact with the blockchain without the need to hold or spend cryptocurrency for transaction fees, reducing barriers to user entry and increasing access to DeFi applications, thereby encouraging broader adoption.
Fastest Finalization Layer
Concordium is significantly faster than Bitcoin or Ethereum, with an average of 11 seconds, ensuring high responsiveness for DeFi applications and allowing users to conduct transactions or provide liquidity almost instantaneously.
Higher Transactions Per Second (TPS)
High TPS prevents transaction congestion, supports advanced use cases, and allows more users to engage with the system simultaneously.
Low and Stable Transaction Fees
Fixed fees in euros that are always predictable and consistently low.
Science-Based Platform Designed by a World-Class Team
The Concordium blockchain is designed with safety in mind, and research conducted in COBRA serves as the backbone that provides the technical foundation for protocols and innovative technologies.
Modern Smart Contract Language
Smart contracts written in Rust provide safety, high adaptability, and verifiability.
Protected Transactions
Increased security, user data protection, and enhanced trust in the DeFi ecosystem through increased privacy and confidentiality.
New Concordium Ecosystem: The First Regulatory-Ready DEX in the Market
Concordex, designed as an optimized DeFi gateway for institutional investors, offers numerous features including staking, exchange, trading, and complex liquidity management. This toolset not only makes DeFi accessible but also highly beneficial for institutional players.
By eliminating the complexities traditionally associated with centralized liquidity market-making models, Concordex allows even novice investors to find an accessible platform to enter the DeFi space, thus ushering in a new era of trust in Web 3.0.
Key Benefits
- Improved usability of DeFi
- Utilizes smart contracts to automate liquidity pool management
- Optimal yield for liquidity providers
- Liquidity pools on this platform offer concentrated liquidity and multiple fee levels
- Continuous and faster block production
- Compared to the current Nakamoto-style consensus, block speed may be doubled or more
- Continuous and fast finalization
- Provides the best user experience in its class
- Enhanced baker management
Here, “baker” refers to a group that runs the Concordium consensus algorithm on their computers or in the cloud. They order transactions sent to the chain and build it block by block. Concordex bakers can manage their nodes more easily with the new ConcordiumBFT consensus.
- Transparency of Baker Performance
Provides better metrics to representatives when deciding which baker to delegate their stakes to.
At the end, we aim to familiarize you with a few case studies:
Concordex
Concordex is the first decentralized exchange designed to comply with regulations in this space; this exchange aims to create a secure DeFi gateway for institutional investors, offering features such as staking contracts, cryptocurrency exchanges, futures trading, and complex financial management. This toolset not only makes the world of DeFi accessible but also proves to be highly beneficial for institutional players. The Concordex exchange combines the fundamental principles of Concordium with a blend of decentralization and regulatory compliance, addressing the practical vision that blockchain-based applications can be decentralized while adhering to regulations.
Regulatory Strategies for Crypto Assets: A Global Perspective
With the emergence and expansion of the crypto space, especially Bitcoin, over the past decade, the world’s financial dynamics have changed dramatically. However, during this time, one can observe the contradiction between Bitcoin’s nature and the regulatory efforts of governments and organizations.
Bitcoin is recognized as a decentralized cryptocurrency that does not require a central intermediary, a characteristic that contrasts with the efforts of governments and organizations to regulate this space. This cryptocurrency is built on decentralization and financial freedom principles, while regulators seek to control and monitor to prevent abuses and criminal activities.
Governments and organizations are striving to find solutions to balance these contradictions. One significant project in this regard is the World Economic Forum project. This initiative is recognized as an effort to develop a global regulatory framework in the crypto and blockchain. By emphasizing global coordination in regulating crypto activities, this project seeks solutions to integrate Bitcoin and other cryptocurrencies with traditional regulatory systems.
In this context, the World Economic Forum project’s white paper addresses the needs and challenges of developing a global perspective on regulating crypto assets. Through multilateral consultations with experts from the digital currency governance consortium, comprising experts from government officials, regulators, policymakers, industries, and academia, it explores pathways to create an ecosystem for globally regulated digital assets.
As the crypto space emerges as a new realm of currency transfer and online financial activities, regulation and oversight have become significant challenges. The contradiction between the nature of crypto and the need for comprehensive regulations is visible.
On the one hand, the importance of security, privacy, and fast, intermediary-free currency transfers is the main driving force in crypto. These values align with the core idea of crypto: living without the need for government or central organizational interference. On the other hand, the necessity to safeguard information integrity, prevent cross-border applications, and curb criminal activities while ensuring public interest are among the reasons that make precise and global regulations in the crypto space essential.
The issue must be addressed: a balanced path must be chosen at the intersection of crypto’s nature and the necessity for legislation and regulation in this space. This path should support individual freedom and independence while preventing potential risks, such as turning the crypto space into a haven for criminal activities and money laundering. The main challenge here lies in the required flexibility for national and global legal structures and regulations. This highlights the reality that balancing regulating the crypto space and respecting its fundamental principles is one of the significant challenges in the global financial world.
