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Source: Сointеlеgrаph

The crypto wave is coming down and it looks more and more like the Digital Currency Group (DCG) is sinking. But let’s be clear: the current crypto contagion is not a failure of crypto as a technology or a long-term investment. The problem with DCG is the failure of regulators and gatekeepers.

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

In many ways, the company has done a great service to the crypto industry by making investing in cryptocurrencies understandable and profitable for both beginners and retail investors. And during the cryptocurrency bull market, everything seemed to be in order, and users received the highest interest payments in the market.

But as the market cycle shifted, the problem at the other end of the investment funnel became more apparent – how DCG is using user deposits. While not all questions have been answered, the general idea is that DCG entities have lent user deposits to third parties such as Three Arrows Capital and FTX and accepted unregistered cryptocurrencies as collateral.

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

After that, the dominoes quickly fell. Third parties ceased to exist. Cryptocurrency used as collateral has become illiquid. And DCG was forced to ask for capital in excess of a billion dollars — the same value of the FTT FTX token that DCG accepted to support the FTX loan.

DCG is currently seeking a line of credit to cover its debts, and if unsuccessful, the prospect of Chapter 11 bankruptcy looms. The venture capital firm appears to have fallen victim to one of the oldest investment traps: leverage. It essentially acted like a hedge fund without looking like it, lending capital to companies without due diligence and accepting hot cryptocurrencies as collateral. The users were left with an empty bag.

In the non-cryptographic world, rules are made to prevent this very problem. While not ideal, the rules require entire portfolios of financial documents, legal statements and disclosures to be used for investments ranging from stock purchases and initial public offerings to crowdfunding. Some investments are either so technical or so risky that regulators have restricted their access to registered investors.

But not in crypto. Companies like Celsius and FTX followed little to no accounting standards, using spreadsheets and WhatsApp to (mis)manage their corporate finances and mislead investors. Citing “security concerns”, Grayscale even refused to open their books.

Cryptocurrency leaders posting “everything is fine” or “trust us” tweets are not an accountability system. Cryptocurrency needs to grow.

First, if custodial services want to take deposits, pay interest, and make loans, they act like banks. Regulators should regulate these companies like banks, including issuing licenses, imposing capital requirements, conducting government financial audits, and everything else that is required of other financial institutions.

Second, venture capital firms must conduct due diligence on companies and cryptocurrencies. Institutions and retail investors—and even journalists—turn to VCs as gatekeepers. They see the investment flow as a sign of legitimacy. Venture capitalists have too much money and influence not to recognize the main types of scams, scams and Ponzi schemes.

Fortunately, it was to eliminate these problems that cryptocurrency was created. People didn’t trust the Wall Street banks or the government to do the right thing. Investors wanted to control their own finances. They wanted to eliminate expensive intermediaries. They wanted direct, low-cost, peer-to-peer lending and borrowing.

This is why, for the future of cryptocurrencies, users must invest in DeFi products and not in centralized funds managed by others. These products give users control by which they can store their funds locally. This not only prevents banks from fleeing, but also limits the threat of contagion to the industry.

Related: FTX Shows 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 company’s liquidity, what assets it has and how they are distributed.

DeFi also removes human intermediaries from the system. Moreover, if organizations want to overload themselves, they can only do so in accordance with the strict rules of an automated smart contract. When the loan falls due, the contract automatically terminates the user and prevents the subject from destroying an entire industry.

Cryptocurrency critics will quip that the eventual collapse of DCG 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 overleveraged investments — are the root cause of the problems that cryptocurrencies face today, not cryptocurrencies themselves.

Some may also complain that DeFi is ultimately out of control. But it is precisely because of its open and transparent design that it is flexible enough to shake the entire financial industry for the better.

The tide may recede, at least for now. But smart investment in decentralized finance today means we can bounce back when the next flood comes in—and this time in a bathing suit.

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

This article is for general informational purposes and is not intended and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are those of the author only and do not necessarily reflect or represent the views and opinions of .

Source: Сointеlеgrаph

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