trade surveillence

Regaining trust in DeFi: Could trade surveillance be key?

DeFi has been on a pretty wild ride this year.

With the blossoming of the crypto winter, the disastrous demise of multiple “DeFi” companies, and an uncertain regulatory landscape, every month has brought a new battering ram to the public’s trust. 

There is good news. Large institutions are slowly inching towards the realization that the elements of DeFi have merits. While this is a long shot from the decentralization principles that form the basis of DeFi, it seems an acceptance has started to awaken in the finance sector. 

DeFi components have proven to bring vast advantages to cross-border payments and digital identity development, and that’s only the beginning.

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However, after this crazy year, it may be a while until the general public stops quaking in their boots at the sound of “crypto and “blockchain.” That is unless trust can be regained. 

Trade surveillance could be fundamental in building public and institutional trust as the world progresses with DeFi development. 

Trade surveillance and crypto’s regulatory wasteland

OK, so perhaps “wasteland” is a slight exaggeration. Numerous regulatory bodies worldwide are attempting to regulate the new asset class. In continuing the development of crypto technology, this regulation could be necessary. 

As famously put by Gary Gensler, Chairman of the SEC, last year, “At about $2 trillion of value worldwide, it’s at the level and the nature that if it’s going to have any relevance five and 10 years from now, it’s going to be within a public policy framework. History just tells you it doesn’t last long outside. Finance is about trust, ultimately.”

Mike Castiglione, Director of Regulatory Affairs, Digital Assets at Eventus. 
Mike Castiglione, Director of Regulatory Affairs, Digital Assets at Eventus. 

However, regulation has been slow. Europe made significant steps this year in the announcement of its MiCA regulation. Although still under consultation and with implementation predicted for 2024, it marked the first extensive piece of regulation aimed at digital assets. 

“In the MiCA regulation, we are seeing the industry is increasingly learning how compliance practices from other asset classes can be applied to crypto,” said Mike Castiglione, Director of Regulatory Affairs, Digital Assets at Eventus. 

“You’re seeing a trend of crypto firms hiring folks with years of finance experience from traditional finance so that they can implement the best compliance processes.”

Eventus has been in compliance for a while, building anti-market abuse software. Specializing in trade and market risk surveillance, as well as providing AML and transaction monitoring, they were founded in 2014 and focus on several asset classes and crypto. 

Castiglione had a long national security career, working with emerging technologies before joining the Eventus team. 

Eventus’ expertise with other assets has helped them identify areas of trade surveillance that could be applied to crypto. Their first digital asset client was Coinbase in 2018, and they have since taken on the likes of FTX and Gemini, among others. 

Castiglione explained that despite the lack of regulation in the space, their clients had taken it upon themselves to implement measures to build consumer trust. 

“A lot of our clients have proactively said that they want to be known as the trusted place for crypto so are interested in adopting the right technologies to apply the lessons from other asset classes to crypto,” he said. “This way, we can identify when there are abusive trades, and therefore do something about it, ultimately deterring that type of activity from their platforms.”

Market abuse runs amok in crypto

According to the Federal Trade Commission, in the 14 months up to Q1 2022, crypto scams stole more than $1 billion from 46,000 people. Insider trading and market manipulation continue to be a problem, although the first official case was not tried until summer this year. 

The development of MiCA and implementation of trade surveillance software could reduce the instance of market abuse. Building on the Market Abuse Regulation (MAR), implemented in 2020, MiCA applies practices to many elements of the digital asset space. 

“We have experience in how to set parameters to comply with MAR. So we’re well placed to apply that to crypto as well,” said Castiglione. 

“MiCA represents an emerging global consensus that as we write the rules for crypto, it has to include anti-market abuse regulations. And that’s certainly front and center in MiCA, clear things that crypto assets service providers have to do to ensure that their platforms are trusted, and they can detect manipulative trading behavior when it occurs.”

For him, implementing such measures could be fundamental to developing digital assets and DeFi.

“It’s having the right technology to earn the market’s trust,” he said. “It’s part of the perception of how transparent and trusted this asset class is.”

market manipulation

Improved trust could affect the community beyond finance

The trust of the asset class has far-reaching implications. Many financial institutions are implementing the underlying blockchain technology and decentralization mindset of DeFi. In fintech and, more recently, traditional finance, Web3 technologies are recognized for bringing solutions to far-reaching issues. 

Castiglione explained that with the increased trust which comes with better anti-market abuse compliance and additional regulation, more institutions might enter the space. 

“The big financial institutions want to enter trusted markets and partner with companies adopting the right compliance processes.” 

“The more trusted markets will get more users and economic activity. It will just grow the pie.”

RELATED: Digital asset potential goes beyond speculative investment at IFGS 2022 

With the increased actors and economic activity in the space, the mechanisms that make up the DeFi could be more widely distributed.  

“The promise of crypto and the Web3 business model is that it expands property ownership and those property rights into the digital sphere,” said Castiglione.

“Once you have that, and once you have more tangible use cases that affect people’s lives, and people see the clear benefit of businesses organized around crypto, you will see greater adoption.”

  • Isabelle Castro Margaroli

    Isabelle is a journalist for Fintech Nexus News and leads the Fintech Coffee Break podcast.

    Isabelle's interest in fintech comes from a yearning to understand society's rapid digitalization and its potential, a topic she has often addressed during her academic pursuits and journalistic career.