From TradFi to DeFi and now CeFi: The Evolution in Markets Requires an Evolution in

Decentralized finance (DeFi) is an ecosystem of smart contract-powered apps that make it possible to lend, save, and trade without a bank or payment processor in the middle. Interest and adoption in DeFi has rapidly exploded, with cryptocurrencies and wallets becoming payment mechanisms that now sit alongside traditional banking payments such as wires and ACH and newer P2P digital payments like Zelle, PayPal and Venmo. Traditional financial (TradFi) institutions are entering the crypto world, and crypto platforms are entering the banking world.

Bridging the two is centralized finance (CeFi). The objective is to create cryptocurrency and digital asset investment opportunities that offer some of the benefits of DeFi with the ease of use and security associated with TradFi. For example, CeFi provides fiat gateways or on-ramps to payments services alongside cryptocurrency custodial services. And unlike the anonymity associated with DeFi, CeFi applications generally require users to complete know-your-customer (KYC) and anti-money-laundering (AML) processes that tie an account to a specific user.

Here’s the current problem. Despite the huge amount of money being spent on detecting money laundering, fraud and market abuse, the same types of schemes that have been operated through TradFi channels are being operated through DeFi channels. This is causing reputation and legitimacy issues for CeFi and DeFi. And while TradFi will always be confronted with financial crime, it has the benefit of a long-established, tightly bound global ecosystem across public and private sectors that work together to combat crime.

Financial criminals have been quick to adapt to change. Money launderers have always been adept at disguising the source of funds and tapping into various account and asset types, but now they can hide behind the anonymity of cryptocurrency. In addition, fraudsters are using DeFi channels to exploit the same scams they have implemented for years in the TradFi world. Among them are:

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