Second, let’s be real—the Wild West days of DeFi are perhaps coming to a close. We all knew it, deep down. The allure of a completely decentralized and completely permissionless financial system is romantic. The truth is more complicated, and regulators can’t look the other way on DeFi bridges forever. I'm Liang Hua, and after years of watching this space evolve, I'm convinced that by 2025, regulators will have a firm grip on cross-chain activity. And here's why.
Regulation: The Inevitable Tide
The fundamental issue at stake Bridges, by design, put risk in one place. They turn into honeypots for malicious actors, as demonstrated by the Wormhole exploit, in which a $320 million evaporated almost overnight. That sort of scary headline doesn’t just panic app users—it sends shockwaves through government regulatory agencies.
Think about it: regulators are charged with protecting consumers and preventing illicit activity. Bridges, given how they allow the movement of valuable assets across arbitrary borders with relative anonymity, are truly a perfect storm of potential abuse. It’s more than just the hacks though, it’s the money laundering, sanctions evasion and ability to fund illicit activities that make them such a threat.
The implosion of Multichain should serve as a cautionary tale. It came on the heels of the often bizarre arrest of its former CEO and a record high $125 million dollar hack. When one point of failure can, in an instant, cripple an entire system, stranding users, that’s a big problem. You can be sure that regulators are watching closely for any such risk.
And don’t fool yourself, they’re hardly sitting idle. MiCA in the EU is the first major signal of a shift in this regulatory landscape. The US will likely develop its own framework in response. We can safely expect onerous ID verification, licensing, and anti-money-laundering rules, as well as bans on specific types of stablecoins where they are used in cross-chain transfers.
Here's the unexpected connection: consider the traditional financial system. We have these KYC/AML regulations for a reason because when financial flows are unchecked, they can destabilize entire economies and fund malign activity. DeFi, as it currently exists, does not have these protections. The question should no longer be if regulation will occur, but instead how regulation will take place.
Security Breaches Breed Demand For Oversight
The DeFi subsector continues to be celebrated for its innovation, and rightly so. Innovation without strong security is a recipe for chaos. Bridges, due to their complicated smart contracts and dependence on multiple forms of cross-chain validation, are even worse off.
The constant stream of hacks—not just Wormhole and Multichain, but countless smaller exploits—erodes trust and fuels the narrative that DeFi is inherently risky. That narrative reinforces the regulators’ hand, emboldening them.
Look at it this way: every major hack becomes a PR win for those advocating for stricter oversight. Each successfully released exploit is a data point that proves their worst fears and legitimizes their intervention.
And here's where the anxiety kicks in. If you’re a user with assets on a bridge, would you feel confident in its security? Can you risk going to bed at night knowing that one undiscovered vulnerability may erase all of your assets? That regulatory doubt in itself is a huge driver for regulatory acceptance. People want the more centralized security, even at the expense of some decentralization.
The desire for a seamless user experience is still at play here. Currently, crossing the bridges is an awkward and disorienting experience. While abstraction has been a tremendous assistance, abstraction is not a silver bullet. Further, regulated bridges increase security and uniformity of processes. Despite losing some of the “DeFi spirit,” this might be the most user-friendly approach to take, too.
Innovation May Lose to Investor Protection
This is the tough pill to swallow. DeFi bridges entice users for their permissionless nature and ability to connect DeFi ecosystems across multiple blockchains. These very same qualities create major regulatory pitfalls.
The lock-and-mint, burn-and-release, and liquidity based systems are all really creative, but fairly complicated and susceptible to exploits. Though validator-based systems have their own centralization pitfalls, even “trustless” systems depend on complex smart contracts that can be hacked.
The regulators will counter that the need for investor protection outweighs innovation. They’ll work on protecting against waste, fraud and abuse, providing transparency and accountability, and holding operators of bridges to high standards. That might result in tougher capital standards. It would require audits to be done and restrict the assets that they can transfer across bridges.
Here's the unintended consequence: overly restrictive regulations could stifle innovation and drive activity underground. In response to this, developers may simply be scared off from developing new bridges, avoiding the regulatory cost. Furthermore, users may be driven into the arms of unregulated platforms, thereby only increasing risk exposure. Ironically, the very problems that regulators are seeking to address could be worsened.
It’s no longer a matter of if regulation will arrive, but rather how it will take shape. A more balanced hand is required, an approach that encourages innovation while ensuring user protections and undeterred illegal activity. Under the present climate, my concern is that regulators will be too cautious. They may focus on inhibiting creativity rather than recruiting it. In that scenario, decentralization loses.
