Some of the fiercest debates in crypto concern two big topics: custody of digital assets and regulatory oversight. As recent industry events have demonstrated, trusting centralized organizations to store crypto can create potential issues for users.
Using a centralized exchange, although straightforward and time-efficient, can expose users to a higher risk of potential scams and fraud due to the autonomous functioning of the exchange. Not only this, but the simplicity of the user experience can often create a false sense of confidence, leading to ignorance on how to handle assets and safe transactions.
These flaws of centralized exchanges make the system a magnet for crypto criminals.
One of the most notorious examples of a centralized exchange mishap is the Bitfinex hack in 2016. It is safe to say that Ilya Lichtenstein (aka “Dutch”) and Heather Morgan (aka “Razzlekhan”) were only able to pull off the grand heist due to the autonomous functioning of the exchange. They mimicked the commands of Bitfinex’s security system, allowing the criminals access to thousands of assets of multiple different users.
However, at the same time, implementing self-custody of assets on a platform can create challenges of its own with many often calling into question the amount of regulatory oversight or compliance that such a platform would offer. Regulatory agencies around the world are increasingly training their sights on crypto exchanges and platforms for any hint of misconduct, making this an even more critical issue for operators and users alike.
The greatest advantage of decentralized exchanges (DEXs) is that, by design, they don’t require a singular authority to regulate transactions. Self-custody allows for the sole access of private keys to your wallet, allowing you and only you to control what you want to do with your funds. To put it simply, you are your own bank.
However, what most DEXs fail to attract is the eyes of institutional and retail audiences. This is due to slow transaction speeds, higher costs and the complications of learning a new form of technology. Because a sole entity owns the private keys, more education is needed to handle what one wants to do with their funds. This is where regulatory authorities in a centralized exchange play a role. A clear directive from the government is needed for there to be mass adoption and increased e-commerce confidence.
Failing to onboard institutional and e-commerce customers to decentralized exchanges is a lost opportunity for blockchain technology due to the great advantages blockchain has over traditional banks generally. Current banking systems have slow protocols, with payment processes taking even longer than what decentralized exchanges are known for. These benefits extend beyond transaction rates, from cutting costs and improving business processes to greater data security and a seamless customer experience.
A durable yet trustless regulatory framework is what the e-commerce industry needs to continue offering its shareholders faster, cheaper and more secure transactions through blockchain technology.
The mission of crypto, in general, is to democratize finance on a large scale. While decentralization and innovation can be impacted by unnecessary regulation, it’s important to find a middle ground for the growth of the space. So, how can the industry strike a balance between these, at times, competing interests?
The answer lies somewhere in between the two.
Budd White is the co-founder & chief product officer of Tacen.
This article was published through Cointelegraph Innovation Circle, a vetted organization of senior executives and experts in the blockchain technology industry who are building the future through the power of connections, collaboration and thought leadership. Opinions expressed do not necessarily reflect those of Cointelegraph.