Since macro liquidity turned positive for the first time since early 2022, and with crypto ETFs seeing net inflows exceeding $1.1 billion in a single week, market optimism seems to be reigniting. However, beneath the surface price fluctuations, a war concerning the fundamental attributes of the crypto industry has already begun. This is not just another simple bull-bear transition, but a "Three Kingdoms" battle involving sovereign nations, traditional financial giants, and DeFi-native forces. Capital is the army, regulation is the supply line, and geopolitics is the invisible chessboard, with each party's actions redefining the boundaries and future of this industry.
The Battlefield Overview: The Warm Current of Capital and the Ice River of Power
The pulse of the market is accelerating. Analysis from research firm Delphi Digital indicates that global net liquidity has shifted from negative to positive, a macro backdrop that has historically been a strong booster for risk assets. The influx of funds is visible: Bitcoin ETFs recorded a net inflow of $461 million, while Ethereum-related products attracted $308 million. This warm current of capital is injecting much-needed confidence into the anxious market.
But beneath this warm current lies two opposing ice rivers. The first comes from geopolitics. Russia is nationalizing cryptocurrency with unprecedented force. Its presidential economic advisor, Maxim Oreshkin, has explicitly stated that crypto assets should be included in the balance of payments, and Bitcoin mining, which accounts for nearly 16% of global hash power, should be regarded as an "undervalued form of export." This is not only a direct response to Western financial sanctions but also a clear signal of elevating cryptocurrency from a marginal asset to a tool of national economic strategy.
The second ice river originates from within the traditional financial system. A regulatory war over the future of DeFi is unfolding in the United States. On one side are DeFi protocol builders like Uniswap founder Hayden Adams, who insist that equating developers with centralized financial institutions and imposing regulation is a fundamental misinterpretation of the principle of technological neutrality. On the other side are traditional financial giants represented by Citadel, which are reportedly pushing regulators to impose stricter responsibilities on DeFi developers through lobbying efforts. This is a direct confrontation over control and market share between the old and new financial orders.
The Three Forces and Their Chess Games
In this complex game, each participant has clear motives and non-negotiable interests.
Russia: The Survival Law of Sovereign Nations
For Russia, embracing cryptocurrency is not a matter of technological belief but a necessary choice under geopolitical realities. After being cut off from the mainstream international financial system, Russia needs an independent, censorship-resistant value transfer channel. Legalizing crypto payments for foreign trade and defining Bitcoin mining as an export-generating industry essentially builds a parallel economic system that is not controlled by dollar hegemony. Their bet is on the resilience of the national economy and sovereignty, with cryptocurrency as a tool to achieve this goal.
Traditional Finance (TradFi): The Incumbent's Defense Battle
Wall Street giants view DeFi with caution and hostility. DeFi automates core financial functions like trading and lending through smart contracts, aiming for "disintermediation"—which is precisely the foundation of profits for traditional financial institutions. Therefore, pushing for regulation of DeFi developers is a precise "surgical strike." If they can successfully define developers as "intermediaries" responsible for compliance, then the unpermissioned innovation of DeFi will be stifled in its cradle, and the entire ecosystem will have to submit to the rules and licensing systems of traditional finance, ultimately being absorbed or marginalized. Their bet is on maintaining their market intermediary status worth trillions of dollars.
Decentralized Finance (DeFi): The Builders' Utopian Debate
DeFi builders, represented by Hayden Adams, are fighting for the soul of the industry. They believe that once DeFi protocols are deployed on-chain, they become a public good, similar to the TCP/IP protocol of the internet, and their creators should not be held responsible for actions occurring on the protocol. This "code is law" philosophy is the cornerstone of the entire decentralized finance edifice. If this principle is breached, developers will face enormous legal risks, innovation will stagnate, and DeFi will lose its revolutionary potential as an alternative financial system. Their bet is on the entire future of open, permissionless finance.
Transmission Mechanism: How Conflicts Reshape the Market
These grand narrative-level conflicts are permeating every corner of the market through specific mechanisms, triggering a series of chain reactions.
First, the emergence of the "sovereign crypto" model may lead to further differentiation in the global crypto market. Russia's actions provide a template for other countries facing similar geopolitical pressures. In the future, we may see a crypto economic circle composed of sanctioned countries or economies seeking "de-dollarization," with their own regulatory standards, liquidity pools, and infrastructure. This not only provides a new source of legitimacy for cryptocurrencies but may also exacerbate global regulatory fragmentation.
Second, the regulatory hunting of developers poses the most direct "software layer" threat to the industry. If regulatory pressure ultimately reaches individual developers, it will directly strike at the source of innovation. Open-source contributions may decrease, and talented developers may leave the field due to fear of legal risks or choose to anonymize and underground their projects, thereby increasing uncontrollable risks in the market. This will fundamentally change the open collaborative culture of the crypto industry.
Finally, the internal vulnerabilities of the industry are becoming the best excuse for external intervention. Recent reported security incidents, such as the $128 million loss suffered by the Balancer protocol and the $36.8 million theft from Upbit exchange, continually remind the market that this industry has a long way to go before maturity and safety. Similarly, the massive crypto assets involved in the Russian corruption case (approximately $214 million) reinforce the stereotype of cryptocurrencies being used for illegal activities. These internal issues provide a steady stream of ammunition for external forces advocating for stringent regulation.
Essential Insight: The Struggle for Control of the Financial "Middle Layer"
Peeling away all the complex appearances, the essence of this war is the struggle for control over the "middle layer" of the future financial system.
In the traditional financial world, banks, brokerages, exchanges, and other institutions constitute this middle layer. They monopolize the channels of value transfer through licenses, capital, and reputation, extracting enormous profits from it.
The revolutionary aspect of DeFi lies in its attempt to replace this human-institution-based middle layer with open, transparent, automated smart contract code, thereby reducing costs, increasing efficiency, and breaking down entry barriers.
The counterattack from TradFi is fundamentally about pulling this "code middle layer" back into the regulatory framework of the "institutional middle layer." By making developers responsible for the code, they attempt to forcibly insert a centralized responsible entity into the decentralized world—an entity that can be regulated, sued, and controlled.
Russia's strategy is even more unique; it seeks to establish a "sovereign middle layer" backed by national credit, serving national interests. This middle layer utilizes the censorship-resistant characteristics of crypto technology, but ultimate control remains firmly in the hands of the state apparatus.
Whoever can define and control this "middle layer" will dominate the financial order of the next era.
Industry Insights and Future Projections
In the face of this multi-party game, the future path of the crypto industry is no longer a single linear development but may lead to multiple differentiations.
One path is the "compliance bright avenue." Represented by Bitcoin ETFs, this part of the crypto world will deeply integrate with traditional finance, accepting strict regulation and becoming part of mainstream asset allocation. It will have enormous liquidity but will also lose much of its disruptive potential.
Another path is the "decentralized thorny road." Core DeFi protocols and developer communities will continue to explore in the regulatory gray area, pursuing more thorough decentralization and censorship resistance. This path is fraught with uncertainty and risk, but it retains the initial revolutionary spark of the crypto industry.
The third path is the "geopolitical parallel universe." Driven by specific countries or regions, a relatively closed but self-contained crypto economic system will form, serving specific political and economic goals.
For every project and developer involved, this is an era that requires a choice. Should they embrace regulation and enter the mainstream, or uphold the principles of decentralization and expand in the margins?
The return of macro liquidity provides the industry with a valuable breather and development opportunity. However, it also exposes the crypto world to the spotlight of global power struggles. How far this cycle can go will no longer depend solely on technological breakthroughs and market sentiment, but on whether it can find its place in this "Three Kingdoms" battle concerning survival and definition.
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