The original blockchain trilemma highlighted the difficult choice users had to make between decentralization, scalability, and security, where they could only prioritize two out of the three. However, a new trilemma has emerged, focusing on products, customers, and regulatory approval, where again, only two can be chosen.
When it came to the technological trilemma, Ethereum was known for its strong decentralization and security but struggled with capacity. With the transition to Proof of Stake (PoS) and the introduction of layer 2 networks, Ethereum has made significant progress in offering scalability without compromising security and decentralization.
The shift to this new trilemma was prompted by the approval of Bitcoin and Ethereum ETFs in the U.S. and the implementation of regulatory frameworks like Markets in Crypto Assets regulation (MiCA) in Europe. This has led to a fundamental shift in the digital asset market landscape.
Many major digital asset companies face the challenge of having products and customers but lacking regulatory approval. Despite having a customer base and digital asset offerings, these firms are unable to operate onshore due to regulatory restrictions.
Another group of firms, operating in regulated markets, have regulatory approvals but struggle to attract customers. They have focused on creating digital assets in a compliant environment but lack a legacy customer base.
On the other hand, traditional financial institutions have a large customer base and regulatory compliance processes but do not offer digital assets.
Regulators play a crucial role in determining the suitability of digital asset offerings for mass-market customers. They differentiate between products for retail investors and sophisticated investors due to the high-risk nature of cryptocurrencies.
Cultural differences between various entities also pose a challenge in creating a seamless ecosystem. The mindset of crypto natives differs significantly from that of traditional financial institutions, making collaboration difficult.
In conclusion, achieving a perfect balance between regulatory approval, product range, and customer base is a complex task. The market is evolving towards a more mature state where most customers can find suitable offerings within a regulated framework. However, the risk appetite of individual users may vary, and not all traditional financial entities may cater to their needs.
Overall, the digital asset market is progressing towards a state where offerings are “good enough” for most users, striking a balance between risk and regulation. As the market matures, customers and entities will adapt to the evolving landscape, finding opportunities within the regulatory framework.
Please note that the opinions expressed in this article are personal views and do not necessarily reflect those of CoinDesk, Inc., its owners, or affiliates. Additionally, the views do not represent those of the global EY organization or its member firms.