DC, CEO of HashKey Capital, talks with CZ, CEO of Binance, to exchange mutual views on CeFi and DeFi security, regulation and more.

From April 12 to 15, the "Hong Kong Web3 Festival 2023", co-organized by Wanxiang Blockchain Labs and HashKey Group and hosted by W3ME, was held at the Hong Kong Convention and Exhibition Center. CZ, CEO of Binance, had a roundtable conversation with DC, CEO of HashKey Capital, who said that CeFi and DeFi have different risks and both need to take security into account. In fact, traditional financial service providers and banks all have risks, even in various countries, and you just need to learn how to manage the risks. It's very important not to look at things in a naive black or white way, but to have a balanced perspective.

He also noted that the industry is worst off if there is no regulatory clarity, and that even a strictly restrictive regulatory regime is better than this, where practitioners at least know what they can do. With clear regulatory rules in place, there will still be some good or bad decisions. Each decision on the direction of regulation is certainly a consideration, and there is a need to find an ideal balance, while the balance may also be changing over time. Currently most regulators do not have experience in the crypto industry, and most financial industry regulators only have banking experience, so communication between industries is very important.

"The focus in the Web3 space is primarily on basic applications, what I call experimental or early innovation, and once the technology is proven to work, I would hope that it will benefit hundreds of millions of people, but the wallet is by far the biggest point of difficulty holding back cryptocurrency adoption." CZ also said in the roundtable conversation.

The following is the full text of the conversation:

DC: Good afternoon everyone! I know it's a very long, but very exciting day, I'm Chao Deng, CEO of HashKey Capital, we are the largest and the earliest investor in the blockchain space, we are institutional Investors and have invested over $1 billion and over 500 global projects since 2015. I'm very honored to have a fireside chat, usually I take a few minutes to introduce the guest, but today this guest needs no introduction. Ladies and gentlemen, let's all welcome CZ and thank you for taking the time to join us, would you like to start by saying Hello to the audience?

CZ: Hi everyone, I'm the CEO of Binance. I couldn't make it due to time conflicts, I've been to Hong Kong many times and I like it very much, and I'm looking forward to attending this conference next time.

DC:  Today this topic is about CeFi, and I want to ask some questions on behalf of the audience about the CeFi ecosystem to hear your thoughts and your insights. First of all, from the security issue that users care most about, we've seen some security incidents recently and some people were saying in previous years that CeFi was not that secure due to its reliance on a centralized infrastructure. How do we prevent infrastructure failures to ensure that users' money is safe?

CZ: CeFi and DeFi have different risks and both need to take security into account. CeFi has its own risk profile, not that one is safer than the other, you have to take the security measures into account. For CeFi, CeFi's exchange can also be very transparent with good proof of reserves, and this is verifiable on the blockchain.

For example, Binance's wallet address is actually very transparent, in contrast to FTX's wallet address which is never made public, so CeFi's platform can actually be more transparent than traditional financial service providers if it is transparent.

When it comes to DeFi, if you can keep your keys properly protected, keeping your own private keys would be a good way to go and have more control. But I think most people today don't have the means to fully secure or protect their keys properly, even with a computer or hardware wallet, they still need to make backups and protect the backup data as well, so there are a lot of factors that have different risk characteristics. Users must take all of these into consideration and not just unilaterally consider saying one is better than the other. And wallets can also be attacked while using DeFi, as I encountered yesterday when a user's wallet IP address was compromised, causing him to lose his funds.

DC: The second issue is trust related to security, after some of the infamous internal collapse of the CeFi platform, the key factor that has been in the news and headlines around CeFi is "trust/lack of trust", how can users trust CeFi companies? What can CeFi and Web3 companies do to re-establish trust within the user community, including other relevant stakeholders to gain trust?

CZ: When we talk about trust, I usually think about three levels:

The first level, the reliance on technology. In our de-trusted industry, it is possible to use technology to verify that technology can have utility to some extent. If you use Bitcoin, or if you use blockchain, you can verify on your own if your money is there, your keys, etc.

The second level, for the platforms, you do any service and business, even if you say you use blockchain, bitcoin, you still have to trust the community. That trust takes time to validate, especially for centralized platforms. There have been thousands of failed exchanges over the past decade, so trust takes time to gain and is something that must be proven through our actions, and I believe that Binance has a very strong user trust.

The third level is to educate yourself and manage risk. Every thing you do has risks, centralized platforms have risks, DeFi has risks, traditional financial service providers, banks have risks, and even various countries have risks, you just need to learn about risk management. It's very important not to look at things in a naive black-and-white way, but to have a balanced perspective.

DC: For the next question after trusting the platform with confidence, talking about the exchange is the gateway to get people into cryptocurrency or Web3. A lot of people are getting into cryptocurrency and into Web3 through Binance, but looking at the user experience, there's still an experience gap between Web2 and Web3 applications, what's stopping users from getting to Web3 in a way? Can you share what Binance has done to improve the user experience and how do you see CeFi being able to further improve the user experience and bring more users into the Web3 world?

CZ: It's true, today CeFi experience in Web3 is not that good, from the user's point of view, they need to register, they need to do 2FA authentication, they need to do hardware key, they need to do KYC and proof of address, there will be a lot of risk control at different stages.

In Web2, most Web2 don't need to do KYC, most social media for example when using Google, WeChat is not required to do KYC, so Web3 this user experience is not as simple as using the Internet.

When it comes to DeFi, most of the DeFi is without KYC and AML process, in fact it is much easier to use. But today most people tend to use CeFi because they prefer to use email, customer service support, and if they lose their password, they can simply get it back after going through verification.

In the Web3 world, because we're dealing with user assets where security is paramount. We have not yet achieved an optimal solution to make everything very secure and very easy to use at the same time, and security and convenience are inversely proportional. We have to use a very large number of security measures, and hopefully with the corresponding technological enhancements, we can reduce these layers of measures.

Speaking of which, Binance has done a lot of things to improve user experience, such as in KYC, we will provide local KYC process by country and by region, using local government database and using local suppliers to propose specialized and customized solutions. For example, we use local driver's licenses for KYC and use localized solutions.

But overall, I am not very satisfied with the experience of using Web3, there is a lot of room for improvement, but this also means that there are many opportunities.

DC: Thanks CZ, you talked about CeFi vs DeFi at the beginning and there was a forum discussion on the subject this afternoon. The conclusion is not a case of CeFi and DeFi fighting against each other. There may be a time when CeFi and DeFi are coexisting, do you agree with that conclusion? Do you think DeFi and CeFi will coexist in the next year or years?

CZ: Indeed, CeFi is not against DeFi, and DeFi should not be against anyone. In the decentralized world and the decentralized industry there shouldn't be a threshold, anyone can participate. Any two people working together is centralized, pure decentralization doesn't exist, when you form companies, when you form project teams, that's centralized, there's always going to be some centralized element to a decentralized world.

From the DeFi perspective, we want to help more people move from the traditional industry to the crypto asset and DeFi industry, to build a "bridge" between those two places, and we're actively facilitating that transition. So what we're trying to do right now is to work together to fill the gaps in terms of technology, products and services. Because there are so many gaps to fill, it's not about competition, it's about user choice whether you use DeFi or CeFi. If more people use DeFi, more people will use CeFi, and there are different user groups on both sides, so we just need to work together to make the industry bigger.

DC: In terms of the comparison between CeFi and DeFi, how do you see mass adoption? We've had a couple of cycles talking about this, what do you think will trigger mass adoption of crypto and blockchain and what will be the trigger point? Is it a killer app? Is it regulation? Or is it competition? Where is the progress now? What exactly will be the next wave of triggers?

CZ: The question of what will trigger the next mass adoption always varies over time, and I honestly can't predict it, I couldn't guarantee in early 2013 to predict that Bitcoin would take off as massively as it did; 2017 was the year of ICOs, everyone was doing ICOs; DeFi took off in mid-2020, and the next hot thing in 2021 was NFT.

What's important right now is that we need to provide the ecosystem so that people can try different things, and different things take different amounts of time. If I were asked that today, I would say that many governments are trying to control cryptocurrencies, but doing so may instead trigger the growth of cryptocurrencies, and more restrictions on traditional financial markets will drive more people to the market for cryptocurrencies. The best way to get people to stay in traditional finance is to bring down traditional market rates, make transactions easier and better enhance the user experience. But the lack of improvement in the traditional finance industry right now is what we see driving the industry now or in the future.

DC: Since you mentioned the government and the industry, before I end I have to ask you about your views on regulation. Thank you very much to the Hong Kong government for its strong support of the Web3 industry, which is why we were able to gather in Hong Kong this week for the Web3 Carnival. We all agree that regulators should be involved in interaction, communication to develop good rules, a good regulatory framework, and also the need to be able to balance, encourage innovation and prevent illegal practices and criminality. What advice would you give to regulators? How can they design well-thought-out but practical and pragmatic regulatory frameworks. And what advice would you give to industry practitioners? There are many practitioners here who are in dialogue with regulators, and this is really a very important topic.

CZ: This is a very important topic. I totally agree with you that the industry is at its worst without regulatory clarity, even a strictly restrictive regulatory regime is better than this, where practitioners at least know what they can do. For example, in 2017 Chinese regulation required exchanges to cease operations, so we left. With clear regulatory rules in place, there are still decisions that can be made, for better or worse. Each decision on the direction of regulation is certainly considered, and there is an ideal balance to be found, while the balance may also change over time.

When the industry is still very early, the main thing is to let the industry evolve, because at that point you can't predict what's going to be hot. For example, there is no reason to set regulation for NFT when it is not yet widespread, or to set the scope of regulation for a future area that we don't know about yet. Now we need to let the industry develop and grow first, and after it grows, there may be all kinds of unscrupulous people or people who damage other interests, and then we need to isolate these people from regulation to prevent them from harming others.

There is also a natural tendency for regulators to try to use the regulatory template of the traditional financial industry and apply it to the cryptocurrency space, but the two are not the same. And there are different types of crypto assets, some look more like securities, some look like commodities, some look like functional tokens, and some are a combination of several of these characteristics.

So it's very essential for regulators to be able to have a deep understanding of the industry, and I must be blunt and say that most regulators currently have no experience in the crypto industry, and most financial industry regulators have only banking experience, so communication between industries becomes very important; for practitioners, they must be very active in dealing with regulators, for example, we actively communicate with regulators in various countries, and some Some countries are very receptive to government regulation, while others are skeptical, it doesn't matter, all we have to do is to continue to communicate patiently.

Usually the first version of regulatory regulations, will be overly restrictive. From the current limited regulatory framework, to all of a sudden become excessively harsh regulation, there must be adjustments, it also takes a while to find the best balance, this is my view. Binance is also very proactive in communicating and dealing with regulators in countries around the world, and we are happy to explore more possibilities in Hong Kong.

DC: Which Web3 area will be very exciting for you in the next two or three years?

CZ:It's good in many ways. My focus is primarily on basic applications, what I call experimental or early innovation, which is determined by my personal character. Once the technology is proven to work, I would hope that it will benefit hundreds of millions of people.

Now some experiments are very interesting, NFT, Bitcoin and other blockchain, cryptocurrency payment, in the end, we still have to solve the wallet problem, the current wallet is not good enough, I think this is the biggest difficulty point that hinders the adoption of cryptocurrency at the moment. For Binance, what we have to do as a platform service provider is to enable people to have access to cryptocurrencies and also to enable projects to build cryptocurrency ecosystems. This is our perspective, but personally, I find many things very interesting.

DC:There's a lot to look forward to, and with limited time, this conversation ends here. Thank you very much CZ for sharing with us so candidly and insightfully!

Reprinted from PANews