Home CryptocurrencyAltcoin Thanks to regulators and whales, Digital Currency Group is facing disaster

Thanks to regulators and whales, Digital Currency Group is facing disaster

by SuperiorInvest

The cryptocurrency boom is out, and it’s looking more and more like the Digital Currency Group (DCG) is going under. But to be clear: The current crypto contagion is not a failure of cryptocurrency as a technology or a long-term investment. The problem with DCG is the failure of regulators and gatekeepers.

Since its inception in 2013, DCG’s Grayscale Bitcoin Trust (GBTC)largest bitcoin (BTC) trust in the world, offered investors the opportunity to earn a high interest rate – above 8% – simply by buying cryptocurrency and lending or depositing it with DCG.

In many ways, the company did a major service for the crypto industry: investing in cryptocurrencies was understandable and lucrative for beginners and small investors. And during the crypto bull run, everything seemed fine as users received market-leading interest payments.

However, as the market cycle changed, the problem at the other end of the investment funnel – the way DCG leveraged user deposits – became more apparent. While not all questions have been answered, the general idea is that DCG entities were lending user deposits to third parties such as Three Arrows Capital and FTX, accepting unregistered cryptocurrencies as collateral.

Related: My “I told you so” SEC story on FTX

The dominoes fell quickly after that. Third parties are gone. The crypt used as collateral has become illiquid. And DCG was forced to make capital calls in excess of a billion dollars – the same FTT token value of FTX that DCG took to support the FTX loan.

DCG is now seeking a credit facility to cover its debts, with the prospect of Chapter 11 bankruptcy if it defaults. The venture capital firm has apparently fallen victim to one of the oldest investment traps: leverage. It essentially acted like a hedge fund without appearing to, lending capital to companies without doing proper due diligence and accepting “hot” cryptocurrencies as collateral. Users were left holding an empty bag.

In the non-crypto world, regulations are set up to prevent exactly this problem. While not perfect, the regulations mandate entire portfolios of financial documents, legal statements and disclosures for investments – from stock purchases and initial public offerings to crowdfunding. Some investments are either so technical or so risky that regulators have restricted them to registered investors.

But not in cryptocurrencies. Companies like Celsius and FTX maintained essentially zero accounting standards and used spreadsheets and WhatsApp to (mis)manage their corporate finances and deceive investors. Citing “security concerns,” Grayscale even refused to open its books.

Crypto leaders issuing “everything is fine” or “trust us” tweets do not represent a system of accountability. Crypto needs to grow up.

First, when guardianship services want to accept deposits, pay an interest rate and make loans, they act like banks. Regulators should regulate these companies like banks, including issuing licenses, setting capital requirements, mandating public financial audits, and everything else that other financial institutions must do.

Second, VCs need to do proper due diligence on companies and cryptocurrencies. Institutions and retail investors—and even journalists—turn to VCs as gatekeepers. They perceive investment flows as a sign of legitimacy. VCs have too much money and influence to fail to identify the underlying scams, scammers and Ponzi schemes.

Fortunately, cryptocurrency was created to eliminate these very problems. Individuals did not trust Wall Street banks or the government to do right by them. Investors wanted to be in control of their finances. They wanted to cut out expensive middlemen. They wanted direct, low-cost, peer-to-peer lending and borrowing.

This is why for the future of cryptocurrencies, users should invest in DeFi products instead of centralized funds managed by others. These products give users the control to manage their funds locally. Not only does this eliminate bank attacks, but it also reduces industrial contagion threats.

Related: FTX showed the value of using DeFi platforms instead of gatekeepers

Blockchain is an open, transparent and immutable technology. Instead of trusting talking heads, investors can see for themselves the liquidity of the company, what assets it has and how they are allocated.

DeFi also removes human intermediaries from the system. What’s more, if entities want to overload themselves, they can only do so under the strict rules of an automated smart contract. When the loan is due, the contract automatically liquidates the user and prevents the entity from liquidating the entire industry.

Cryptocurrency critics blast that DCG’s possible implosion is yet another failure of an unsustainable industry. But they ignore the fact that the problems of the traditional financial sector – from poor due diligence to over-indebted investments – are the root causes of the challenges facing crypto today, not crypto itself.

Some may also complain that DeFi is ultimately unmanageable. But its open, transparent design is precisely why it’s flexible enough to shake up the entire financial industry for the better.

The tide may be ebbing, at least for now. But smart investments in decentralized finance today mean we’ll be able to dive back in when the next stream comes – and this time in a swimsuit.

Giorgi Khazaradze is the CEO and co-founder of Aurox, a leading DeFi software development company. He attended Texas Tech for a degree in computer science.

This article is for general information purposes and is not intended and should not be considered legal or investment advice. The views, thoughts and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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