Why the US risks falling behind in the new era of DeFi

Last month, China's central bank injected a record $92 billion of liquidity into the world’s second-largest economy, as the country shifts away from its zero-Covid policy and towards economic recovery . After three years in a pandemic , both its citizens and the financial markets breathed a long sigh of relief. Around the same time, news emerged that Hong Kong's financial regulator could soon legalise retail cryptocurrency trading in the country. The Securities and Futures Commission of Hong Kong is calling for public feedback on a newly proposed licensing regime for cryptocurrency exchanges, which could lead to its cryptocurrency market opening up as early as July this year. This news brought a welcome boost for cryptocurrency prices , with markets expecting a huge injection of capital from China via Hong Kong as the recovery takes hold. There is much to be excited about as the $18 trillion global powerhouse prepares to come back to life. China’s move to loosen monetary policy is necessary if it wants to hit its 8 per cent annual economic growth target, create new jobs and keep its economy running smoothly. And given the interest of China’s 1.4 billion population in cryptocurrency — despite the fact that cryptocurrency transactions were banned by the government in September 2021 — the news is bound to support this year’s cryptocurrency rally. We are already seeing the positive effects, with these expectations pushing Bitcoin closer to its $25,000 goal last week. Meanwhile, China-based cryptocurrencies, such as Neo, Conflux, and Flamingo are up 38.2 per cent, 109.3 per cent, and 9.4 per cent, respectively, in the week ending February 24. When even Hong Kong, which was handed over to China by the UK in July 1997, changes its stance on cryptocurrency, it gives a strong signal to the market that the digital economy is here to stay. Yet US regulators are stubbornly continuing with their harsh approach to cryptocurrency regulation, seemingly oblivious to how isolated the its economy could become if it fails to embrace innovation. Over the past few weeks, the US regulator continued to make enemies of the world’s largest cryptocurrency exchanges. This includes Binance, after the New York State Department of Financial Services told blockchain company Paxos to stop minting BUSD, a Binance-branded stablecoin pegged to the US dollar. Meanwhile, US-based exchange Kraken reached a settlement with the US Securities and Exchange Commission for $30 million and agreed to stop offering staking services to US clients. In a Twitter post on February 20, Kraken chief executive Jesse Powell hit out at US regulators, saying they “let the bad guys get big and blow up because it serves their agenda”. Kraken is not alone in this. Following the collapse of FTX in November 2022, a growing number of cryptocurrency companies, including Nexo and Binance, have suspended services to US clients, bowing to pressure from the regulators. This concerning and shortsighted trend will inevitably hold the US back in the Web3 race, while the rest of the world moves into a future defined by digital innovation. As more and more cryptocurrency businesses are forced out of the US, the industry will naturally shift to Asia, which is embracing it with open arms. Some countries in Asia, such as China, India, South Korea and Thailand, are already piloting central bank digital currencies (CBDCs), but this has raised concerns about the level of control CBDCs allow . In some cases, for instance, there are time limits placed on citizens' ability to spend CBDCs, which discourages saving for the future. This leaves the burgeoning decentralised finance (DeFi) sector stuck between a rock and a hard place. However, no financial system can grow without a strong injection of capital. This boost, along with government support, are necessary to bring cryptocurrency into the mainstream. The only question now is where support will come from. But one thing is clear: as long as the US continues to systematically destroy cryptocurrencies, it faces the risk of pushing the industry offshore and ceding control to other countries. Instead of holding on to a legacy currency that has outlived its usefulness, the US needs to embrace the potential for innovation and disruption that blockchain technology brings. Otherwise, it is at risk of falling behind the rest of the world in the inevitable new era of DeFi. Stefan Rust is the founder of Laguna Labs, a blockchain development house, and former chief executive of bitcoin.com

Why the US risks falling behind in the new era of DeFi

As American regulators continue to clamp down on cryptocurrency exchanges, the country will be held back in the Web3 race