The 1.0 version of the Crypto Credit Markets was fraught with opacity and dependence on artificial DeFi yields. The market was also prone to fraud and the loosest financial conditions in recent history. But with the rise of hybrid CeFi/DeFi credit markets, credit is being extended under-collateralized in a transparent manner. This is a massive improvement over the default CeFi model. But what are the barriers to accessing this new market?
The public acceptance and awareness of cryptos are causing regulatory hurdles. According to Pew Research, a non-partisan think tank in Washington, 16% of U.S. citizens have used, traded, or invested in cryptocurrencies. In addition, Newsweek Magazine cited a survey conducted by the crypto firm New York Digital Investment Group in January 2022. The survey estimated that 46 million Americans could benefit from cryptos, or about 14 percent of the population.
As the crypto lending market grows, so too are its benefits. Platforms like Cred have introduced new features to attract investors. For example, the company’s point-of-sale system and supply chain lending have drawn praise. The platform also offers flexible interest payment terms, which are essential for attracting more investors. The next phase of the market, though, is undergoing significant disruption. There is an enormous potential for growth in the crypto credit market.
Despite these challenges, many countries are experimenting with the concept of cryptocurrency credit. Chile, for instance, is developing a legal framework to allow its citizens to invest in digital currencies. Meanwhile, lawmakers in Chile are working to recognize bitcoin as a legal form of payment. In Colombia, however, crypto companies are banned from banks. However, the government is stepping in to ensure the safety of the cryptocurrency industry. There is also a broader regulatory framework in the works in other countries.
Regulation of crypto firms needs to be careful. While there are numerous risks associated with these firms, the underlying technologies are highly innovative and have potential to transform the credit sector. Many crypto firms operate outside of the regulatory perimeter. The process of transitioning into a regulated environment can be challenging, and the latest setbacks include the ban in China. And while regulators are reluctant to ban crypto, they can not rule out the risks associated with this industry.
Bitcoin is a good form of collateral. It’s cryptographically auditable, a digital bearer instrument, and cheap physical delivery. It outperforms gold specie. Gold is expensive to verify and consumers rarely want to trade notes for gold. But the idealized form of “full reserve” banking rarely occurs under free market conditions. The Scottish “free banking” system, for example, had reserve ratios of only two to five percent, which is far below the current levels of crypto lending.
The SEC is a powerful regulator of the industry. In addition to the Federal Reserve Board, the Securities and Exchange Commission, Treasury’s FinCEN, and the Commodity Futures Trading Commission are also involved in the industry. While these are the main agencies regulating crypto, the recent spate of regulatory settlements indicate that they are listening. There are a number of ways in which they could work together. In addition to extending existing regulatory protections, SEC has a goal of ensuring that the crypto sector remains stable and profitable.