5 Practices to Learn from TradFi to Better Protect Crypto Users
The crypto industry would be wise to learn from and adopt TradFi’s proven principles and processes for consumer protection.
Crypto pioneers and decentralized finance companies frequently talk about their commitment to providing financial opportunities to underserved populations, but this is only half the battle for this fledgling industry. Global consumers must have confidence that the funds they invest with cryptocurrency companies are safe, secure, and easily withdrawable when needed.
While traditional financial institutions may not provide all of the new and unique opportunities and potential of DeFi, they do have a long history and established methods for protecting consumers’ investments — and maintaining their trust.
Here are some helpful things the crypto industry can learn from the TradFi industry, including practices DeFi companies should consider adopting and adapting for their own customer base.
- Creating an insurance system
DeFi firms do not have the FDIC insurance that TradFi firms do, but that should not prevent us from creating our own. The best way to ensure safety and security is to have working insurance systems that use smart contracts to automatically issue payments to affected parties. TradFi has a bureaucratic system in place to accomplish this; we can do the same, and much more quickly, using decentralized systems
- Educating customers on important information
Before investing in cryptocurrency, it is critical that the consumer 1) is comfortable handling their own money in a decentralized world, as opposed to the centralized world of financial institutions; 2) has thoroughly researched reputable wallets and exchanges before sending crypto or money to them; and, most importantly, 3) understands the phrase “not your keys, not your coin.” In the decentralized world of finance, it is critical to educate consumers about these facts.
- Putting safeguards in place to reassure the public
Proper insurance would be very useful in both centralized finance (to protect against theft and misuse) and DeFi (to guard against hacks and exploits). Many people and institutions would be relieved if we could effectively solve insurance for crypto and fiat client funds.
- Ensure that customer assets are not improperly mixed
Customer funds security is both a cybersecurity and an accounting issue. It is critical to have proper mechanisms in place to ensure that no customer’s assets are commingled in a way that is inconsistent with a custodial mandate. Furthermore, it is critical to understand that only banks are designed to operate on fractional reserves.
- Imposing Penalties for Fraud
Don’t let bad actors get away with it. There are already numerous laws in place that address fund commingling, risk disclosures, and various forms of financial fraud. Enforcing these laws will, at the very least, reduce the number of crimes committed in broad daylight, such as those involving FTX and SBF. TradFi has taught us that moderation necessitates consequences.
All these practices can be adapted by Crypto to protect the customers in a better way.
Tulsi Wadhwani is a NonceBlox Pvt. Ltd. Marketing Intern. She is currently pursuing her Master’s in digital marketing and is eager to learn more about marketing as a whole, analytics, and management.