By Kieran Mesquita, Chief Scientist at RAILGUN
Corporate treasuries are already moving towards greater involvement in decentralized finance (DeFi), but the privacy solutions available fall far short of the level of security used for traditional finance. Until the issue of blockchain transparency is properly addressed, the widespread adoption of crypto and DeFi will pose a challenge for governments, banks, and investment firms.
Institutional involvement in crypto is a reality
It is clear that crypto hedge funds will continue to grow and take a bigger market share of investment opportunities in this space. Even pension funds try to find backdoors in DeFi so that their assets can benefit from the crypto markets. As companies and banks continue to explore the benefits of holding and trading crypto, the industry must prepare for the unique challenges and demands of institutional investors. Two major hurdles remain for corporate treasuries and similar businesses: regulation and confidentiality. Regulation has been widely debated, but now is the time to center privacy in the blockchain conversation.
What privacy does DeFi offer?
Privacy is a natural necessity for institutional investors interested in using any aspect of DeFi. Any company executing blockchain transactions could risk protection of trade secrets, such as names of trading partners or suppliers and financial details of supply contracts. Currently, on-chain trade movements can reveal the owner of an anonymous wallet if those transactions fall into the hands of a nosy blockchain stalker or a government interested in tracking the transactions.
Companies that pay taxes, suppliers, or even employee salaries using cryptocurrencies are opening themselves up to anyone — including corporate spies — who can find details of these deals. Likewise, hedge funds and their clients have the right to protect information about where they keep their assets. Blockchain technology will not only reveal where assets are kept, but when they are moved, how many, and how often. This is granular level information, and it is detrimental to institutional investors – as well as governments – transacting on a blockchain.
Confidentiality can become a legal obligation
Beyond corporate liability, blockchain privacy can become a legal necessity. If the SEC and the EU continue to regulate DeFi as they do with traditional fiat, there will inevitably be a legal need for privacy that corresponds to laws similar to the EU’s General Data Protection Regulation. Even though the transactions of crypto service providers must be shared with tax and judicial authorities under a proposed law currently facing the Council of the EU, it won’t stop merchants from wanting privacy, nor will it stop governments from demanding it eventually. It is likely that cryptocurrency will eventually be subject to the same laws and legal frameworks that govern fiat: transactions and balances must be available for legal financial authority to oversee, but information must be protected from view. of the public to guarantee the rights of individuals. and businesses to maintain confidentiality. It’s not hard to imagine that one day, crypto-trading platforms will need to have a privacy shield capable of producing financial reports in order to be legally allowed to operate in certain economic zones and host consumer trading funds.
Current privacy solutions are lacking, primarily because they require funds to be moved off-chain and passed through a mixer, the likes of which were recently sanctioned by the US for money laundering. Most mixers also limit the parts they can protect and struggle to gain widespread adoption.
Privacy is key to the future of DeFi
Any institutional investor looking to pivot to DeFi will need better crypto privacy. This privacy must be on-chain, nimble enough to accommodate multiple coins, and capable of generating reports for financial regulators. On-chain privacy systems are expected to be the focus of corporate treasuries for the immediate future, to pave the way for DeFi’s long-term viability down the road.
About the Author:
Kieran Mesquita is Chief Scientist at RAILGUN, the first decentralized smart contract project that brings privacy to cryptocurrencies working seamlessly with DeFi. He has extensive experience in developing technology for blockchain and DeFi projects. He was an early adopter of BTC and one of the first people to develop its GPU mining software.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.