Can China’s crypto crackdown benefit the ‘entire DeFi ecosystem’

In a recent interview with Bloomberg, Dawn Fitzpatrick, CEO and Chief Investment Officer at Soros Fund Management commented that Bitcoin was now “mainstream.” She stated,

“I’m not sure Bitcoin is only viewed as an inflation hedge here…this has gone mainstream.”

As Bitcoin and cryptocurrencies are being viewed from the lens of mass adoption, crypto companies continue to pull out of China. Recently, Chinese mining equipment manufacturer, Bitmain stopped supplying to mining equipment to China. Further commenting on China’s recent policy decisions, Fitzpatrick said

“I would say we are not putting money into China right now.”

Owing to the restrictions, local reports claim that “tens of billions of unsupervised funds” have been leaving China for half a year. The report cited that in the first half of 2021, the amount of money flowing out of domestic Chinese exchanges to unregulated foreign exchanges reached US$28.3 billion, which is 1.6 times the total outflow of funds in 2020.

However, that changed between May and June 2021. As the People’s Bank of China tightened its regulatory policy around crypto, the amount of “outflows of the unregulated virtual currency fell by nearly 40%.”

Having said that, these transactions are difficult to track. A spokesperson from China-based Paidun Technology explained,

“…Criminal gangs use multiple false identities to open exchange accounts, making KYC authentication information invalid, and it is difficult to lock real suspects.”

Meanwhile, crypto-asset manager Arthur Cheong commented

“Centralized cryptocurrency companies [exchanges] are currently getting curtailed and restricted… Investors will look for decentralized alternatives, which would benefit the entire DeFi ecosystem.”

Along with benefits, DeFi continued to face challenges around safety and ease of use. Not so long back, SEC Commissioner Hester Peirce had emphasized that only true decentralization will put DeFi into a new regulatory category. She said,

“If you want to make a case that you’re something different than the CeFi or TradFi system, then you have to show that you’re doing something radically different, which, from my perspective, requires decentralization.”

Moreover, China is not the only country clamping down on private cryptocurrency. The partially regulated sector in Russia is also limited to investors. Despite these restrictions, DeFi can step in to cover the gap.
According to Cheong

“In the next five to ten years, the market share of traditional financial services will be taken away by DeFi.”

While DeFi is looking like a rescue bullet for crypto crackdowns, there is still little regulatory clarity in the US as well. Gensler had previously stated,

“…So-called decentralized finance (DeFi) platforms raise a number of challenges for investors and the SEC staff trying to protect them.”