Modern Conflicts and Crypto Are Making TradFi and CeFi Irrelevant

Since the early years of cryptocurrency, the efficacy of centralized finance (CeFi) as an industry has been up for heated debate.

On the one hand, centralized exchanges (CEXs) and other custodial service providers offer convenient ways for users, even beginners, to gain exposure to digital assets. However, solutions owned, controlled, and operated by institutions (even if crypto-oriented) go against the very ethos of cryptocurrency, which is decentralization, trustlessness, and financial sovereignty.

While CEXs dominated the crypto market for several years, the Decentralized Finance (DeFi) boom in 2020 finally brought a much-needed change to the landscape. Despite the rapid growth of DeFi services, CeFi still has a significant influence over the cryptocurrency market, which is often highlighted by unexpected but significant rare events (e.g., the $500 million Mt.Gox hack).

But now, the industry is facing its most challenging incident to date that overshadows all previous events, as it impacts the lives of entire populations instead of a few thousand crypto users that have fallen victim to a cyberattack. This is the ongoing Russo-Ukrainian conflict that exposed the vulnerabilities of CeFi as well as showcased the true value and potential of Decentralized Finance.

The Dangers of Centralization in Crypto

Since Russian troops entered Ukraine on February 21st, Russia has become the world's most sanctioned country, facing over 2,700 new sanctions in less than two weeks. Hundreds of multinational companies and well-known brands like McDonald's, IKEA, Shell, and Netflix have left the country, while the nation has been cut off from the global financial system.

As traditional finance giants like PayPal, MasterCard, and Visa halted their activities in Russia, citizens have increasingly turned to crypto as an alternative solution. To their surprise, Russians have found themselves in the same shoes in the CeFi world.

Crypto service providers aren’t far behind when it comes to sanctions. While the US-based exchange Coinbase has been promoting sanctions compliance with crypto and blocked 25,000 wallets tied to Russians sanctioned or suspected of illicit activity, Russia-issued Visa and MasterCard cards no longer can be utilized for making transactions in Binance's crypto ecosystem.

At the same time, due to the mounting regulatory pressure on the industry, major crypto exchanges in South Korea like Upbit, Bithumb, and Gopax also had to block IP addresses from Russia. Global CeFi providers like CEX.IO and Whitebit restricted access or new registrations for Russian and Belarusian citizens.

Financial Casualties

This is not the first time that platforms like  Binance, Upbit, and Coinbase have to take geo-localized actions. As centralized service providers operating under registered companies, they must comply with local regulations and laws that include sanctions against countries and their citizens.

However, without going into politics or taking sides, harsh sanctions as we could see throughout the Russo-Ukrainian conflict impact entire populations. As a result, masses of individuals that hold no weight in policy or military decisions have to suffer the consequences of their leaders’ doings. When it comes to financial services, this means that the actions of a handful of people have a disproportionate effect in the ability of millions to sustain themselves.

For these reasons, the ability of centralized financial entities to censor people as well as limit their access to critical products and services goes against the philosophy of crypto and decentralization. It also makes an excellent case for the popular statement of "not your keys, not your coins," which emphasizes the dangers of storing funds at CEX services and encourages users to keep their crypto in non-custodial wallets instead.

And the self-custody of your funds is critical to remain financially sovereign, especially amid a major crisis. We have seen this happen during the Russo-Ukrainian conflict, but the Canadian government’s case with the Freedom Convoy truckers also served as an excellent case study.

Through the latter, protesters had to face CeFi’s fundamental issues after the nation’s police force barred all FINTRAC-regulated firms from interacting with 34 digital asset wallets connected to Bitcoin donations. For them, Decentralized Finance remained the only viable option to handle their finances in the crypto world.

DeFi: the New Standard?

Centralized crypto platforms serve as an excellent way to attract and educate new users,  providing them with access to a wide variety of services under one ecosystem. They may function as intended during peacetime, but the crisis in Ukraine and even the case of Canadian truckers serve as proof that CeFi is not reliable or even sustainable in the context where it’s most needed. Obliged to comply with regulations, even crypto products such as CEXs and custodial solutions will have to abide by governments’ demand to ban users, censor content, and selectively restrict access to their services.

A switch to Decentralized Finance seems like the only viable solution. While CeFi is influenced by the decisions of governments and company management, DeFi protocols like Uniswap, PancakeSwap, and Fringe Finance are governed by their communities, lacking the increased authority of centralized companies and even startup development teams.

Just like a  nation-state can't ban Bitcoin or force BTC developers to censor transactions in the network, DeFi's decentralized architecture will continue to remain resilient through sanctions, regulatory laws, and central bank policies. And, as a result, cryptocurrency is getting closer than ever to being recognized as an industry fulfilling its intended role of returning power to individuals through Decentralized Finance and non-custodial digital asset solutions.