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March 8, 2023

Silvergate; MiCa; DeFi funding flows

Welcome to the Swarm Markets’ media memo. This weekly update provides comments from Swarm Markets’ co-founders, Philipp Pieper and Timo Lehes, on key industry news that has caught our eye, plus our own developments. 

Comments available on the following news items:

  • Silvergate debacle just another collateral confidence mess
  • France getting ahead of MiCa legislation
  • CeFi bleeds funding to DeFi


Silvergate debacle is just another crisis of collateral confidence


The burgeoning Silvergate debacle is yet another example of why collateral confidence in digital assets is absolutely key to the future of crypto.


Silvergate is likely the next victim in a fairly long line of fallout from the FTX disaster last year. With crushing liquidity problems it is looking like the bank is going to end up in receivership – if it hasn’t already. 


The nub of this issue is collateral confidence. Without clear provision for redemptions and asset collateral, the bank is unable to meet redemptions. Collateral confidence solves this. 


So how do you achieve collateral confidence? Transparency is key, but the mix of assets needs to stem from tangible real world assets (RWAs) that have a clear definable value. For too long the crypto market has been a function of own-brand tokens that don’t have valuations that bear any clear value in the real world.


As the sector moves on from this issue it will do so in one way- through the tokenization of RWAs and the entrenchment of digital RWAs as the gold standard for DeFi. It is the clear missing piece of the puzzle, but the market is moving toward resolving this and institutions are paying close attention. 


France tightens rules as MiCa presses 


French legislators have voted to bring in new laws that establish tougher rules for digital assets ahead of impending introduction of the EU-wide MiCa framework. 


Much has been made of the need for regulation in crypto thanks to the events of last year, but we’re now at the point where the rubber is beginning to meet the road. This refers to both the implementation of MiCA into local regulatory transfer rules as well as implementing the regulatory review and approval processes.


France’s new rules incorporate much of the digital asset ecosystem into existing financial frameworks and this is the right approach broadly speaking. 


But far from looking like a clamp down on the sector, the digital assets space is going to find considerable benefits in being given a proper framework to operate within going forward. Part of the issue has been the very Wild West of crypto that has lacked anything like oversight in the past few years.


The approbation of effective rules for the sector will give reassurance to investors – both private and institutional – at a critical moment for those looking to innovate and provide new solutions and ideas to financial infrastructure. 


The EU has led in this regard but many regions are getting their acts together to present their own offerings to entice the market to settle there. Yet the tangible execution on the regulatory implementation will be key to continue making the impact tangible. It is an exciting time for the sector, and likely transformational in the coming months. 


Money is flowing out of CeFi to DeFi


Fresh data from CoinGecko suggests funding flows from CeFi to DeFi have surged in the past year as the market gets to grips with CeFi issues and realises the potential of DeFi innovations in comparison. 


The direction of travel is little surprise given some of the spectacular crises of 2022 in CeFi, from Celsius to FTX. The list of DeFi benefits over CeFi grows by the day, but the cornerstones of collateral confidence, transparency, self custody and true decentralization ring out. 


But there’s another aspect to the change in investor fund flow behaviour and that is future outcomes. In 2021 DeFi attracted less than $1 billion, but this surged to $2.7 billion last year. We’d expect this number to continue growing despite wider crypto market contraction overall. The upshot of that is DeFi projects, far from working within more restrictive innovation environments, will benefit directly from CeFi’s failures.


These inflows are going to help grease the wheels of innovation and help DeFi surge ahead of its competition in the months ahead. One of the key trends within DeFi right now is real world asset (RWA) adoption and onboarding to blockchain technology. This is echoed in a recent report from Binance and reports of the institutional financial momentum toward tokenization.


Within this DeFi will need as a sector to get it right on incoming regulation, with offerings that take a positive and proactive approach to new frameworks as they emerge. 


But ultimately the money flows to the places in the market that are seen as the most lucrative from a risk/reward perspective. With fingers burned last year, DeFi is perfectly poised to become a much larger force within crypto more generally.