It has been almost a week since China’s intensified crypto crackdown. It is not the first time China has banned crypto trading and mining, but the latest announcements on Sept. 24 — the most detailed and strictest yet and jointly issued by 10 government agencies — are explicitly warning that all cryptocurrency transactions and the provision of crypto services by overseas exchanges to Chinese residents are also illegal. 

The rapid response from crypto companies such as Huobi, one of the largest cryptocurrency exchanges in the world, is telling of how seriously they are taking the Chinese government’s latest salvo. Huobi stopped account registration for new customers in mainland China on the same day of the bombshell announcement and plans to close down the accounts for existing mainland Chinese users by the end of the year. 

See related article: Chinese crypto exchange Huobi looks to the world as China shuts the door on crypto

Bitcoin and the wider cryptocurrency markets dipped on the news, but soon rebounded. The Chinese exchange tokens have taken a harder hit. Huobi’s Huobi Token and OKEX’s OKB have dropped by over 30% and 15% respectively in the past seven days, according to CoinGecko data. 

But a different corner of the crypto world is rejoicing over the China news. Decentralized finance (DeFi) tokens, in particular those of decentralized exchanges (DEX), are having a ball. Prices of dYdX, Uniswap and Sushi, which facilitate cryptocurrency transactions without an intermediary, have surged. The dYdX token, the governance token for the dYdX decentralized exchange that supports spot, margin and perpetuals trading, rose 80% in the past week as investors and traders shifted their sights and their cryptocurrency away from the Chinese centralized exchanges to DEXes.

Could this shift from centralized to decentralized crypto exchanges signal larger industry trends in favor of DeFi over the longer term? Can DEXes handle the sudden influx of users and capital — and what kind of regulatory forces will likely follow? Crypto industry leaders that Forkast.News reached out to and speakers at a ConsenSys-sponsored panel discussion this week on “The DeFi Opportunity for Institutions” offered some answers.

This Q&A has been edited and condensed.

Rachel Lin, co-founder of  SynFutures, a decentralized derivatives exchange

A lot of people initially brushed off the news as just a reiteration of China’s existing crypto ban, but it’s different this time around and a lot more severe. The nature of the statement yesterday is much more serious as it is the first time all legal enforcement agencies are involved. As with any regulatory statement coming out of China, it’s important to note who the issuers are.

Chinese crypto exchanges have already started to suspend their services to Chinese users. The statement that people living in China but working for offshore crypto exchanges can be subject to legal prosecution is also a cause for concern.

The silver lining in this is that by saying that investors who hold crypto are at their own risk, it implies that China hasn’t banned users’ trading. In comparison, individuals who trade FX and convert their CNY into USD surpassing an annual quota could be subject to criminal charges. But in the near to mid-term, hopes of large-scale new entrance of funds from China are dimmed as a result of this latest announcement.

Another silver lining is the growth of the DeFi industry. DeFi will surely benefit from the recent regulatory headwinds from both China and the U.S. with its decentralized nature. We are seeing users migrating to DeFi even when some CeFi platforms are still accessible due to concerns of counterparty risk. As more retail traders move to DEXs, liquidity will continue to improve and professional investors will start building more positions, thus creating a positive feedback loop and driving greater adoption.

Vince Yang, co-founder of zkLink, a multi-chain assets aggregation platform

We have seen a very sharp rise for the DeFi tokens such as dYdX, UNI and SUSHI. Why? Because this time, a lot of users will seriously consider learning how to use DeFi protocol for trading and other activities like lending, borrowing or derivatives. We can also expect trading volumes on centralized exchanges to continue to drop in the near future and the OTC trading platforms like Huobi and Binance will shut down. Users will move to DeFi in the short to mid-term. Capital will move on-chain and trading volumes on DEXes and on-chain apps will rise. We’ve already seen this from dYdX and Perpetual Protocol, and will also see more interest in Uniswap and SushiSwap.

The potential for DeFi projects is great and overall, the influx into DeFi is a win for the space. Existing projects will attract more users and capital and can also expect a rise in governance tokens. New projects will also potentially get more attention and fundraising.

But there are also potential challenges with the rise of DEXes. I personally think that they’re not yet ready to handle the influx —  the influx of users, capital and trading volume migrating to on-chain apps can lead to potential issues with the platforms themselves. I’m curious to see if the DEXes can handle the influx.

The U.S. Securities and Exchange Commission’s monitoring of DeFi could lead to more regulation in the future. The more capital flow, the more attention DeFi will receive. Overall, the latest crackdown in China is an indicator of what’s to come as DeFi becomes a more important role of the crypto industry and also an important part of the global financial system.

Tony Toro, head of communications at Polygon Hermez, an Ethereum scaling solution 

So far, every China ban has ended up being an endorsement of the original promise of cryptocurrencies. The most recent ban on miners starting in the Spring of 2021 has provoked a much-needed wave of decentralization of mining power, which helps to minimize the centralization risks of Bitcoin and other major cryptos. 

In the same way, this ban on exchanges might trigger the growth of decentralized exchanges and other DeFi services, not to mention peer-to-peer and OTC trading. We still may see more bearish winds in the short term, especially as Chinese investors are pulling out some capital, but overall, the ban seems bullish for DeFi.

Charles d’Haussy, managing director APAC for ConsenSys, an Ethereum software company 

DeFi is already a very large ecosystem, where we see a lot of innovation. But when you see one market tightening the rules for such a massive population, I think we’ve seen into the pricing of some of the DeFi assets, very clear opinions from the market that there is a migration and the true value proposition, which is really standing out now that some of some of the market of crypto traders will not get access anymore to centralize infrastructure. It’s one of the catalyst events which helps everyone to get a new wave of adoption.

Ajit Tripathil, head of institutional business for Aave, a DeFi protocol

What’s going on in China is more like a bit of tiger parenting. Policymakers haven’t had a chance to respond to the innovation and growth of this industry. And with the Evergrande situation and the risk of capital flight, China is responding in a bit of a reactive way. But it’s a very strategic industry for China. I know quite a few firms that employ a lot of people, contribute quite a bit to the GDP and the growth in the crypto industry. So I don’t think this ban or the previous ban is the state of play for a very long time. I think it’s just the policymakers buying some time to create appropriate regulation and policy around digital assets while they respond to the bigger debt overhang and the economic situation with Evergrande and the excessive credit in the economy, so I think it’s going to be fine.

Cynthia Wu, head of business development and sales at Matrixport, a digital asset financial services platform

This pressure is definitely real. It’s going to be followed up with a lot of administrative power that is on the municipal level and on the province level, which is going to put real pressure on the centralized platforms operating in China to the Chinese onshore clients. That definitely will be the reality in the short term. As a result of that, in the near term, that would potentially drive a lot of the activity and trading volume onto DeFi, including a lot of decentralized exchanges. 

But in the longer term, eventually, if China is going to be very cautious about the capital outflow, it could potentially extend the policy coverage to DeFi. Similar to what the SEC has been asking in the United States, where they have been investigating the DeFi protocols and to understand whether there’s a possibility to add a KYC layer, I think that that practice might be adopted by the Chinese government going forward as well.