What is Regulated Decentralized Finance, or RegDeFi?
By Robin Massini

Feb 09, 2021

RegDeFi is short for Regulated Decentralized Finance, an innovative concept that has begun to take the cryptocurrency world by storm.

Decentralized Finance (DeFi) has become the next frontier for financial reform. Through novel blockchain technology, many of the pain points and legacy machinations of the financial industry as it exists today can be remedied. It is no wonder that interest in DeFi has reached an all time high and the spotlight is on DeFi projects to deliver on its promise. In fact, we’ve already written several pieces on the future of decentralized finance. But with the explosive interest in DeFi comes an evolving understanding of its boundaries.

What would it take for DeFi to become a viable alternative to the financial industry? How can participants in the existing financial ecosystem tap into the benefits of decentralization?

Regulated Decentralized Finance, or RegDeFi for short, provides the answers.

Adding Regulation to DeFi

In our previous article series “The Dawn of Decentralized Finance”, we described DeFi as such:

“DeFi aims to improve financial services and sectors as they exist today through revolution instead of evolution, crafting a fresh approach to the status quo processes that have become bloated over the course of decades of incremental change. Certain procedures, intermediaries, fees, and accessibility limitations are (or can be made) redundant with today’s technology. DeFi is the idea that more efficient and effective systems can be put into place.”

DeFi is powered by smart contracts on blockchain, the technology behind Ethereum and Dusk Network. It is an innovative form of finance expressed in programming code via smart contracts, that removes the need for financial intermediaries, like brokers or clearing houses. This way, all transactions are made directly between participants.

RegDeFi may become the new back-bone of the financial industry

Smart contract blockchain technology like Dusk Network have the opportunity to become the infrastructure, or back-bone, of a large part of the financial industry. However, it must be designed for compliance.

DeFi applications allow for new methods of creating and transferring assets. If these methods are to disrupt the global financial industry, adoption is needed. And adoption requires adherence to the existing rules and regulations, no matter how fragmented and different these applications are across the global markets. RegDeFi achieves this.

Through RegDeFi, existing financial applications can benefit from the advantages of decentralization, such as business model scalability, while users and businesses can rely on the code to see their finances protected through compliance with existing frameworks, standards, rules and regulations.

The Benefits of RegDeFi

  • Regulated Financial Market can embrace and adopt
  • Modern applications provided by already trusted Financial parties lead to adoption by the general public
  • Innovation of financial services
  • A brand-new way of experiencing finance
  • Lower barrier to investorship
  • Highly Scalable
  • Brand new asset types

The decentralized finance applications currently out there stand to benefit significantly if adopted by regulated financial markets. These regulated markets are where the money (and liquidity) is. With improved liquidity, markets become more fair and robust.

The more inventive alternate services will rely on RegDeFi to see the light of day. Staying within the existing regulatory boundaries is the only way to achieve adoption by the general public. By this, we mean institutional and retail users of tokenized assets, and investors in said assets.

Tokenized assets can be anything from stocks or bonds to digital assets. As long as it is represented in a tokenized form. Because RegDeFi products adhere to existing regulations, its adoption potential is far more obvious and far-reaching than its crypto-minded predecessor, DeFi.

RegDeFi Allows for the Creation of Brand New Asset Types

The very nature of RegDeFi allows for the creation of brand new asset types, to specifically cater to businesses in different life cycles. When an exceeding amount of the economy’s value is represented via digital assets, it unlocks major opportunities for financial infrastructure reform. Through RegDeFi, stocks could automatically issue dividends, and financial services available to the company could automatically change based on the evolution of the company in its lifecycle. When it comes to the programmability of smart assets, the opportunities are endless. It is just a matter of RegDeFi adoption and, by extension, DeFi adoption.

Having tokenized assets also provides lower barriers to investorship. From a broader perspective, RegDeFi brings forth brand new ways for enterprises to connect with their investors and turn loyal customers into brand aficionados, best illustrated by a simple example.

“Imagine, in the not so distant future, you’ve visited this great restaurant in town. And on your way out, you decide that the place is worth co-owning. You want a piece of it, so you login to your account, search for its token by scanning the QR-sticker at the exit, and purchase a small stake in the venture. Acquiring additional benefits such as discounts in the process.”

RegDeFi is Highly Scalable with Network Benefits

Thanks to RegDeFi, investors can quickly and easily find other investors to trade with, without incurring exorbitant fee stacks of brokers. And because RegDeFi is highly scalable, it has the ability to bring together global markets, reducing the cost of acquiring capital for organizations, and investors alike. Even local restaurants stand to benefit, as RegDeFi provides a new channel to create customer-investor relationships. Additionally, the assets can be expressed as in small quantities, or micro-fractions of the assets. This process is called fractionalization and greatly benefits investors with smaller amounts to trade with, or precision-traders who look for very precise portfolio management.

The restaurant scenario above highlights the archaic nature of the current financial system, where this would never be possible. The example, however, is but one of many applications through which regulated decentralized finance is set to become deeply ingrained into society.

Regulated Decentralized Finance: The Next Financial Revolution

The financial industry as it exists today is a disparate, untethered entity, full of unconnected financial services. The sector is ripe to be connected, as it stands to benefit a lot from interconnectedness. However, the incentives of the individual members of the financial markets are not aligned to create a common infrastructure for public good. Which is why open-source, public, and permissionless blockchain systems receive so much attention. They are uniquely positioned to create valuable interactions among the currently unconnected financial markets.

In particular, DeFi is an incredibly interesting testing ground for financial applications and concepts. Once successful, they can be enhanced with technology that provides confidentiality guarantees and regulatory compliance features, and thus turning DeFi into RegDeFi.

With RegDeFi, all governmental and institutional safeguards, as well as privacy regulations, are met in a decentralized (public and permissionless) environment. This effectively means that people can rely upon regulatory protection, while benefiting from decentralized finance solutions. It also means that, instead of going through processes powered by ancient technology, people’s high expectations of modern technology can be met. Take, for example, single sign-on via Digital Identity Solutions (DID); instant settlement of transactions; and complete freedom in choosing where to trade. Their assets would no longer be platform-locked.

By platform-locked, we mean the regulated assets of investors are bound to the vendor those assets were purchased from. For instance, if an investor holds two of the same securities on two separate exchanges, merging those two balances can take days (if not weeks) and incur significant fees. With regulated decentralized finance, investor assets are no longer platform-locked. Instead, they are credited to the investor’s account, or digital identity, and can be taken and utilized with complete freedom.

The Big Picture: Macroeconomic Benefits of a RegDeFi Market

A regulated decentralized financial market can change the current market dynamic completely. Investors are put back in control and can access opportunities previously unavailable to them in a more inclusive financial ecosystem that enables them to purchase the digital securities of local businesses or participate in fast-rising shares of global tech unicorns. Most importantly, they acquire direct ownership and all of the associated benefits. For example, investors can reach out to companies directly, and be invited to partake in shareholder meetings or receive their dividends straight into their self-hosted wallet, exchange wallet, or custody-account.

From a business perspective, this improves the way that we interact with, and experience, finance. The cost of capital attraction can be severely reduced through process automation and a more vibrant community of stakeholders can be created. RegDeFi is a tide that raises all boats, and it is poised to become a public utility. One that benefits the ways we participate, the ways businesses extract benefits from their stakeholders, and the volume of information that is available about the company. Regulated decentralized finance decreases the barrier of going public. It changes the way we look at ownership in early stage companies and allows investors to grow with the business across its lifecycle. RegDeFi provides all of the tools needed to enhance the bond between investors and companies.

To appreciate the opportunity of a regulated decentralized financial market, we should take a look at the macroeconomic undercurrents that are driving decision-making today. How does it play into the major trends that are shaping the world, and how does RegDeFi capture societal benefits?

One way to answer this question is to apply the same yardstick as the EU Digital Strategy.

(i) a technology that works for people

RegDeFi holds the interests of users at heart, whether they be retail investors, businesses, or governments. A major downside of the current financial system is that the lack of incentives to evolve has resulted in only incremental improvements to the system. We shouldn’t rely on a system whose incumbents are only incentivized to change if it fits their business model. RegDeFi makes finance more fair, and gives back freedom to the people. Decentralised financial markets are an opportunity for financial service companies to transition away from legacy systems and old business models; to adopt modern technology and provide equal opportunities to people.

(ii) a fair and competitive digital economy

“A frictionless single market, where companies of all sizes and in any sector can compete on equal terms, and can develop, market and use digital technologies, products and services at a scale that boosts their productivity and global competitiveness, and consumers can be confident that their rights are respected.” This paragraph is an excellent summation of RegDeFi, in the context of the financial market.

(iii) an open, democratic, and sustainable digital society

“A trustworthy environment in which citizens are empowered in how they act and interact, and of the data they provide both online and offline.” With the addition of ‘Regulation’ to ‘Decentralized Finance’, data privacy is assured for individuals and market manipulation is safeguarded against, in a decentralized fashion. Citizens of the EU won’t need to trust centralized authorities to have their best interests at heart; they’ll be provided with a new digital way to interact with the enterprises or commodities of their choosing. The financial market would be non-discriminatory in nature, as KYC-requirements and AML-regulations are set in code, and in effect for everything under European jurisdiction.

(iv) global standards, easily implemented when governmental policies change

“The EU is committed to setting global standards for emerging technologies and will remain the most open region for trade and investment in the world, provided that anyone who comes to do business here accepts and respects our rules.” The EU, similar to its global counterparts, holds a unique position in the new financial system. Instead of continuously monitoring all centralized authorities to ensure adherence to rules and standards, these rules and standards can now (for some part) be written directly into the code. By means of smart contracts and the global interconnectedness of the blockchain, any present and future regulations will be automatically imposed on all relevant actors. Additionally, blockchains leave detailed audit trails which can be used to prove adherence to these standards.

Dusk Network: building towards a single EU market

To shape Europe’s digital future, regulated decentralized finance is vital in paving the road for a single market ecosystem. We cannot expect the existing financial market players to give up their special positions for the greater good if it lowers shareholder value (more on this in the article series by Jelle Pol, Business Lead Dusk Network). That is why we have been developing a new infrastructure from the ground up, with a solution for governments to add regulation to decentralized finance.

RegDeFi is about empowering businesses of any size to access the capital market. It is about granting retail investors the same ownership rights and control that only a select few institutions are experiencing today. And it is about reshaping the financial market to truly deliver on its promise of a single market.

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