Berlin-Based Firm Swarm Markets Targets the Masses of DeFi Skeptics

Traditional banking and DeFi are often at loggerheads with many who doubt the ability of decentralized, permissionless platforms to provide the same level of consumer protection as is available on regulated platforms.

But regulation and decentralized finance don’t have to be mutually exclusive, Swarm Markets Co-founders Philipp Pieper and Timo Lehes told PYMNTS — and they’re on a mission to prove the naysayers wrong.

Swarm Markets is a Berlin-based firm that operates under a regulatory license from Germany’s Federal Financial Supervisory Authority, also known as BaFin. It also claims to be the world’s first regulated decentralized trading exchange (DEX).

In an interview with PYMNTS, Lehes said: “There are things coming in the very near future that nobody else is offering, which is going to offer much more proof of the value of licensing, being a secure place to trade [and] also being the place where you can find things that cannot be traded elsewhere.”

Data from DeFi Pulse shows that the total value locked, which refers to assets deposited as collateral on DeFi platforms, has increased from about $20 billion to over $92 billion in the last year. According to Lehes, that is a big telltale sign that people are hungry for new ways to borrow and lend, as well as to earn interest and trade assets in a much more profitable, trusted and secure way.

And that’s where he believes Swarm Markets has an advantage, providing a rare regulatory layer with anti-money laundering (AML) and know your customer (KYC) protocols that remove counterparty risk and allow users to be verified while remaining private.

Making Crypto More Accessible

Swarm announced on Wednesday (Oct. 6) that its regulated DeFi platform is now open to the general public, allowing both retail and institutional investors to trade financial products like stocks alongside cryptocurrencies in a regulated and liquid environment for the first time, while bridging the gap between centralized finance (CeFi) and DeFi.

Lehes said the main objective with the public opening is to demystify the regulated DeFi concept by showing users that the easy-to-use platform is like trading on any other FTX token (FTX) or Binance exchange. And even though users have to be verified, given that it’s a regulated platform, “you don’t really see that behind the tech, because it looks just like any other DeFi platform,” he pointed out.

This follows an announcement in July that the company had launched with over $15 million of pledged liquidity from more than 250 customers, a number that Pieper said has since skyrocketed to about 2,000.

And in another bid to reach the masses, Swarm Markets will soon integrate its services directly into Yoti’s digital app infrastructure, enabling users to qualify for access to its services through the free digital app. This will allow Swarm to extend its services to partners of Yoti, including the U.K. Post Office.

Read more: UK Post Office’s ID App to Enable Crypto Purchases

Starting this week, the platform will make crypto vouchers available to all verified users of the U.K. Post Office EasyID app for purchase using their bank account, Visa or Mastercard. And once the user’s identity is verified, customers can redeem the vouchers for bitcoin or Ethereum on Swarm’s platform.

“In the end, it’s a way for the Post Office EasyID app to get propagated into more utility, and we are effectively the first ones in our category to be integrated directly to their identification app,” said Pieper.

Tackling Risks and Downsides

The lack of long or widespread use of the emerging innovation means that solutions for the risks that DeFi presents, such as the lack of consumer protection, are not readily available.

Lehes acknowledged that looking at the events surrounding DeFi in the last 15-18 months, the massive increase in total value locked across numerous platforms drew in a lot of people who built platforms that were “either directly fraudulent or weren’t built in a way that could protect people’s funds.”

Beyond that, there’s also the AML issue, where institutions need to know who they’re dealing with on the other side of the table, and whether the counterparty has been verified in a proper way before they can engage with them.

That is where Swarm Markets, a licensed trading platform, comes in to address these several layers of user uncertainty. Pieper added that even in a situation where a hack is still able to infiltrate its software systems, having that layer of identification would make it difficult for a hacker to simply disappear with stolen funds.

There is also a concern surrounding self-custody wallets, which users participating in DeFi need in order to store their blockchain-based assets. These wallets are secured with a unique, algorithm-generated private key that is almost impossible to recover when lost, ultimately leading to the permanent loss of funds stored in the user’s wallet.

But despite the risk this presents, Pieper said the ability to take custody of funds adds a high degree of confidence that users can choose the tools they want to secure those funds.

That said, those who prefer to have someone else hold custody and execute transactions on their behalf can turn to Swarm Markets to get that service. “That’s why in addition to the trading licenses, we also have a custodian license, because we know that is going to bring into the fold the bigger groups of people who actually need to adopt it,” Pieper said.

The Future of DeFi

Even though Swarm Markets is a long way from crossing the chasm, Pieper said the sheer volumes that are being traded on DeFi protocols are staggering, showing that the monetary value and the number of people who are engaging is quite significant.

What remains is accessing the “biggest prize of all,” which means reaching the large swaths of the population who are still on the fence about the innovative finance system. As Pieper said, these include users who don’t even know what a wallet or private key is, or don’t want the responsibility of holding a private key because of how complicated some of the DeFi blockchain apps can be to use. Or those who simply don’t trust it.

That complexity will disappear, Pieper said, once individuals in that group experience how easy the platform is to operate. And over time, the naysayers will build some trust.

Pieper and Lehes both believe there’s a sea change coming, whereby the blockchain-based trading infrastructure is applied to the broader financial markets, and not just the cryptocurrency markets. And it will disrupt not just the existing legacy banking infrastructure, but FinTechs as well.

“The institutions that we’ve been interacting with for the past 12 months are recognizing that, and they’ve gotten this sense of inevitability that this is happening one way or the other,” he said. “And I think the payments space in general is just about to see another wave of disruption as a result of that.”