By Kieran Mesquita, Chief Scientist at RAILGUN
Corporate treasuries are already pivoting to greater involvement in decentralized finance (DeFi), but the privacy solutions available aren’t anywhere near the level of security used for traditional finance. Until the problem of blockchain transparency is properly addressed, the broad 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 up a larger market share of investment opportunities in this space. Even pension funds are trying to find back doors into DeFi so that their assets can benefit from crypto markets. As corporations and banks continue to explore the benefits of holding and trading crypto, the industry needs to prepare for the unique challenges and requirements of institutional investors. Two major obstacles remain for corporate treasuries and similar ventures: regulation and privacy. Regulation has been widely discussed, but now is the time to center privacy in the conversation about blockchain.
What Does Privacy Offer DeFi?
Privacy is a natural necessity for institutional investors interested in using any aspect of DeFi. Any company executing blockchain transactions could risk the protection of trade secrets, such as the names of corporate partners or suppliers and financial details of supply contracts. Currently, on-chain trade moves can reveal the owner of an anonymous wallet if those transactions fall into the hands of a nosy blockchain lurker, or a government interested in tracking transactions.
Companies that pay taxes, suppliers, or even employee salaries using cryptocurrencies open themselves up to anyone – including corporate spies – being able to find details about these agreements. Similarly, hedge funds and their customers have a right to protect information regarding where they are keeping their assets. Blockchain technology isn’t just going to reveal where assets are kept, but when they are moved, and how much, and how often. It’s information at the granular level, and it’s harmful to institutional investors – as well as governments – conducting transactions on a blockchain.
Privacy May Become a Legal Requirement
Beyond corporate responsibility, blockchain privacy may become a legal necessity. If the SEC and EU continue to regulate DeFi like they do 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 if transactions from crypto service providers must be shared with tax and legal authorities under a proposed law currently facing the EU Council, that will not prevent traders from desiring privacy, nor will it prevent governments from eventually requiring it. It is likely that cryptocurrency will ultimately be beholden to the same laws and legal scaffolding that govern fiat: transactions and balances must be available for the legal financial authority to oversee, but the information must be protected from public view to ensure the rights of the individuals and companies to maintain privacy. It isn’t hard to imagine that one day, crypto trading platforms will be required to have a privacy shield that can produce financial reports in order to be legally permitted to operate in certain economic areas and host consumer trading funds.
Current privacy solutions are lacking, primarily because they require funds to be moved off-chain and put through a mixer, the likes of which have recently been sanctioned by the U.S. for money laundering. Most mixers also restrict the coins they can shield and are struggling to gain wide adoption.
Privacy Is Key to the Future of DeFi
Any institutional investor looking to pivot into DeFi will need better crypto privacy. This privacy needs to be on-chain, nimble enough to accommodate multiple coins, and able to generate reports for financial regulators. On-chain privacy systems should be the paramount focus of corporate treasuries in the immediate future, in order to set the path for long-term viability of DeFi down the road.
About the author:
Kieran Mesquita is Chief Scientist at RAILGUN, the first decentralized smart contract project that brings privacy to cryptocurrencies operating seamlessly with DeFi. He has an extensive background in developing technologies 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.
