Recent difficulties at Celsius, BlockFi, Babel, Vauld and Novi demonstrate the fundamental flaws of centralized finance (CeFi), and clearly demonstrate why centralized operators require far stronger regulatory oversight.

This is according to Marcel Harmann, CEO of THORWallet DEX, who told Be[In]Crypto that in the absence of tougher regulation, users should seek out purely noncustodial solutions.

While cynics may say that it is hardly surprising that the CEO of a noncustodial solution would argue for noncustodial solutions, recent events would make it increasingly hard to argue that the point is factually wrong.

The bear market has witnessed protocols including Celsius and Babel Finance making changes to their service offerings, often in the form of reduced or suspended withdrawal functions. The changes are billed as “temporary” when announced, but can last for weeks. Celsius first suspended withdrawals on June 13, but nearly a month later, have yet to lift restrictions.

On July 4, CoinLoan lowered its withdrawal limits and Vauld suspended all trading activities. The two join a growing list of crypto companies who have imposed some kind of limit or suspension on their customers, preventing them from accessing all of their money.

As Harmann sees the situation, these types of decisions make the case for regulators to handle crypto projects no differently than traditional financial institutions.

“With Vauld joining Celsius, BlockFi, Babel and even Meta’s Novi, it is clear that CeFi fundamentals are lacking,” he said.

“When institutions manage funds, regulation is needed. This is why CeFi should be regulated like traditional banks. When users manage their own funds in a noncustodial way, and on a peer-to-peer basis, they need education,” Harmann added.

A noncustodial solution is one where no third party holds the funds. Simply put, noncustodial means self custody.

Harmann points out that non-custodial wallets, DEXs and decentralized money market protocols for lending and borrowing rely purely on the code.  This immunizes them against the vagaries of bosses who might seek to suspend services during a market downturn.

“They facilitate trust between strangers, which is essential for the future of inclusive global finance,” said Harmann.

While the users of decentralized solutions may look at custodial platforms with a sense of superiority, there are still some risk factors at play.  We put it to Harmann that code can be attacked, or exploited, and that in DeFi it frequently is. 

“Over time, the most trusted solutions will prevail,” said Harmann. “Should a decentralized protocol with volumes in the billions go without incident for years on end, this is a sure sign that the code is trustworthy.”

The post CeFi Should Be Regulated Like Traditional Banks, Says DeFi Boss appeared first on BeInCrypto.

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