A Dialogue with Columbia University Finance Professor Prof. Agostino: Conversations and Collisions Between Traditional Finance and the Crypto World
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A Dialogue with Columbia University Finance Professor Prof. Agostino: Conversations and Collisions Between Traditional Finance and the Crypto World
"Cryptocurrency investment holds tremendous potential in expanding traditional financial services, and the key to unlocking this potential lies in empowering financial investment paradigms to address the unique risks and opportunities presented by the digital world."
Navigating Web3 tides with focused insightsInterviewer: Frank Fan @Arcane Labs
Interviewee: Prof. Agostino Capponi
Edited by: Joseph, Sutianne @ Arcane Labs
"Crypto investment has enormous potential to expand traditional financial services, but the key is to empower the financial investment paradigm to deal with the unique risk profile and investment opportunities of the digital world."
——Professor Agostino Capponi
"Cryptocurrency investment holds tremendous potential in expanding traditional financial services. The key lies in empowering the financial investment paradigm to address the unique risks and opportunities presented by the digital world."
——Professor Agostino
Profile:
Professor Agostino currently serves as Associate Professor of Finance at Columbia University, founding director and head of the Center for Digital Finance and Technologies, and a member of the Data Science Institute.
His research has been published in leading academic journals such as the Journal of Political Economy, Journal of Monetary Economics, Review of Financial Studies, Journal of Financial and Quantitative Analysis, Management Science, Operations Research, and Mathematical Finance.
Additionally, Professor Agostino is a researcher at the Crypto and Blockchain Economic Research Forum, an academician at Alibaba Group’s Luohan Academy, and a researcher at Fintech@Cornell Center.
This article presents key excerpts from Arcane Labs’ interview with Professor Agostino of Columbia University, focusing on hot topics including regulation, academic research, DID, SBT, DeFi, industry trends, and赛道 (track analysis).
Key Insights from the Interview:
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It is recommended to reconsider and revise the standards of the Howey Test to include categories of digital assets, thereby establishing a new regulatory framework suitable for the development of the digital asset industry.
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The future regulatory system for digital currencies may be decentralized, where certain regulations are automatically enforced via smart contracts, while others are implemented by KOLs through incentive mechanisms.
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Future regulatory systems and institutions need to be decentralized and operated by an international regulatory committee.
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DAOs struggle to achieve autonomy without robust incentive mechanisms in place.
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There is little conflict between academia, government, and private sector interests—they can even generate significant synergies.
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It is unlikely that DeFi will challenge or disrupt core banking operations over the next decade.
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DeFi introduces a series of unknown risks and potential issues, including oracle risk, protocol risk, governance risk, and arbitrage.
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The pace of DeFi's development progresses hand-in-hand with its regulatory frameworks and policies.
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In markets saturated with homogeneous products and services, only a few will survive after competition runs its course. Time will ultimately allow the market to select value-driven projects, while valueless ones fade away due to declining user adoption.
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Solutions enabling users to protect transaction privacy while allowing validators to derive value from transaction verification could become a key赛道 (track) in the next bull market.
#1 Cryptocurrency Industry, Digital Assets, and Regulation
Frank Fan: How does the Howey Test affect cryptocurrencies?
Agostino: The current securities regulatory framework needs improvement, and the Howey Test must be updated and revised based on digital assets.
The Howey Test legally defines the core characteristics of traditional securities—"agency theory"—where shareholders extract value from managerial efforts via investment returns. Currently, crypto project teams avoid income distribution by repurchasing issued governance tokens, indirectly circumventing the Howey Test. Because developers aim to evade regulation, they design digital assets like stablecoins and governance tokens that do not fully align with existing regulatory definitions.
This shows that current regulatory frameworks struggle to accommodate new types of digital assets emerging in the crypto industry. Therefore, regulators should consider revising the criteria of the Howey Test to include digital asset classifications, enabling the creation of a new regulatory framework aligned with the evolution of the digital asset industry.
Frank Fan: What might replace the current digital asset regulatory framework look like in the future?
Agostino: First, we need to define each type of token and its features, establishing a classification system for tokens. Such classifications would form the foundation of a regulatory framework, upon which specific rules could be automatically enforced via smart contracts. The future regulatory system for digital currencies may be decentralized, with some regulations automatically executed via smart contracts, while others are enforced by KOLs through incentive mechanisms.
Frank Fan: Will there be specialized agencies using smart contracts to regulate digital assets?
Agostino: Given the dynamic and innovative nature of this industry, digital assets will certainly require dedicated regulatory bodies in the future. However, these regulations won't be crafted solely by economists, financial experts, or lawyers from traditional institutions. Rather, individuals within such regulatory bodies must understand the fundamental mechanics of digital assets, be capable of developing smart contracts, and grasp the governance rules embedded within them—to effectively design and enforce comprehensive regulatory frameworks.
Considering jurisdictional conflicts and the 24/7 operation of digital asset markets, this regulatory body must be managed by an international regulatory committee. This committee would mitigate national policy friction and respond promptly to emergencies in the crypto space. If the agency is national or regional, it must build automated regulatory infrastructure to avoid reliance on centralized solutions—after all, the underlying technology and philosophy of digital assets are decentralized.
Regarding decentralization, we must also distinguish between aspects of DeFi that should and shouldn’t be regulated. If DeFi becomes increasingly centralized due to regulation, one possible outcome is mandatory collateral requirements imposed within DeFi ecosystems. While this may enhance resistance to network attacks and gain broader user acceptance, it also strengthens centralization. Another scenario involves users undergoing multiple KYC procedures before trading, making DeFi inefficient.
Therefore, a non-centralized regulatory system and institution are essential, as excessive regulation leads to centralized infrastructure, contradicting the principles of blockchain and digital assets.
Frank Fan: Are there any current governmental or institutional regulators specifically targeting digital assets?
Agostino: Currently, the U.S. has delegated oversight of digital asset markets to two agencies: the SEC and CFTC.
There remains debate over whether digital assets should be treated as securities or derivatives. Neither agency has conducted thorough investigations into emerging digital asset types, and there is no consensus yet on how digital assets should be traded.
Moreover, sanctions against Tornado Cash have sparked debates about whether smart contracts should be subject to oversight. Regulators must pay equal attention to both the financial and technical attributes of digital assets to fully understand their essence. Regulatory standards designed for securities and derivatives are unsuitable for digital assets, and attempting to apply traditional financial market regulations to digital assets is unfeasible.
Some Web3 users believe the crypto industry doesn’t need centralized government regulation, arguing that the Web3 ecosystem can self-govern through incentive mechanisms. However, considering various factors, self-regulation in the digital asset industry is extremely difficult to achieve. For a self-regulatory system to work, investor incentives must align with societal optimal outcomes and regulatory goals. Current self-governance models are often simplistic and intuitive, yet contain many hidden vulnerabilities and risks.
Take DAO governance as an example: most governance tokens are held by early investors and whales. In some cases, individual accounts hold over 50% of total tokens, giving them control over DAO decisions and core governance. Combined with misaligned incentives, this creates ample room for manipulation, sandwich attacks, and exploits.
Thus, DAOs cannot achieve true autonomy without robust incentive mechanisms. If DAOs themselves struggle to ensure fair and impartial self-governance, how can we expect DeFi—or the entire Web3 ecosystem—to achieve it? This is an area the industry must continuously improve.
#2 Academia, Education, and Blockchain Technology
Frank Fan: What is your view on the relationship between academic research and the digital asset industry?
Agostino: I believe there is minimal conflict between academia, governments, and private institutions—and in fact, they can generate significant synergies. Academia can help both the industry and government understand the potential of digital assets and provide guidance to support sound policymaking. We already see scholars joining leadership roles at Coinbase or contributing to consensus mechanism development, indicating academia is helping accelerate progress in the crypto industry.
Academic research is grounded in real-world market dynamics and fundamental operating principles. Just as during the 2008 financial crisis, when academics joined federal agencies to improve financial regulation, today they can play a similar role. Of course, differences between academia and the crypto industry must also be considered.
Since academia studies innovations observed in the industry, academic research inherently lags behind the rapid emergence of new digital assets and services. For instance, I am currently researching automated market maker (AMM) protocols and designing more efficient AMMs to expand liquidity providers and investors within the ecosystem. From another perspective, academic research focuses less on precise implementation details and more on underlying logic and mechanisms. Regarding AMMs, I study how different convexity curves yield varying returns, aiming to identify optimal curve designs. Over time, other DEXs may adopt our findings, benefiting a wider user base.
Currently, there are two types of scholars in the digital asset field. One group strongly supports blockchain technology, while the other remains skeptical. Some skepticism stems from distrust toward cryptocurrencies—the first exposure many academics have to digital assets. These skeptical scholars are accustomed to fiat currency and fail to recognize the value proposition of digital assets. Cryptocurrency mining appears inefficient and energy-intensive, leading some to view it as flawed. Additionally, blockchain consensus algorithms contribute to scholarly doubt about digital assets. In contrast, supportive scholars believe blockchain has the potential to become foundational technological infrastructure, beyond narrow applications in fintech or cryptocurrency.
Frank Fan: Do you think DID and soulbound tokens (SBTs) can effectively impact existing education systems?
Agostino: DIDs and SBTs have many potential applications in education—for example, integrating academic certification into educational systems offers benefits. Completing online course verifications or rewarding students via digital assets are viable use cases. However, centralized education systems and credentialing bodies offer advantages that decentralized systems currently cannot match—such as teacher-student networks formed in centralized environments and collaborative research topics developed through interaction. From this standpoint, blockchain is unlikely to fully replace centralized education systems and certifiers in the short term. Nonetheless, innovative implementations of technologies like DIDs and SBTs may emerge in niche areas.
#3 Outlook on the Future of the Crypto Industry and Trends
Frank Fan: Is DeFi a model innovation or a repetition of CeFi’s mistakes?
Agostino: DeFi has both strengths and weaknesses. On the positive side, DeFi overcomes certain limitations of CeFi and provides better financial services to a broader user base—reducing intermediary costs, enabling real-time settlement, increasing liquidity for users constrained by counterparty risk, and mitigating negative externalities through incentive mechanisms.
On the downside, one limitation of DeFi is the narrow scope of most projects. Many simply replicate CeFi mechanisms in inefficient ways. Algorithmic stablecoins serve as a failed example in the digital asset industry.
Furthermore, we must proceed cautiously, as DeFi introduces entirely new and unknown risks and challenges, including oracle risk, protocol risk, governance risk, and arbitrage risks.
Overall, current DeFi designs in the crypto industry remain inefficient, and the development and maturation of digital assets still have a long way to go.
Frank Fan: Do you think only a limited number of successful products will dominate the digital asset industry—a winner-takes-all scenario?
Agostino: I believe the digital asset industry will evolve into a winner-takes-all market structure. Take DeFi, for example—many DEXs today offer similar services. After intense competition among homogenous products and services, only a few will survive, while others exit the market. From an industry perspective, I believe core digital asset services—such as lending and swapping—will endure. Others, like algorithmic stablecoins, will likely disappear from the industry.
Frank Fan: Many asset management firms now include both digital and traditional assets in their portfolios—the line between traditional finance and digital assets is blurring. Do you foresee full integration or continued separation?
Agostino: In the long run, we will definitely see increasing convergence between CeFi and DeFi. Today, companies and individual clients already use both centralized and decentralized exchanges. Other examples include stablecoins, which are tied to the U.S. dollar (a CeFi concept) but operate within decentralized systems. We’re also approaching the era of central bank digital currencies (CBDCs). Another case is oracles—most manipulable oracles pull data from centralized exchanges. My prediction is that CeFi and DeFi will converge in certain financial domains, creating entirely new business models.
Frank Fan: Regarding widespread adoption of digital assets, how do you view the relationship between progress and risks such as losing access to addresses or custody issues?
Agostino: This depends on how well DeFi develops products and services for non-technical users. I don’t believe DeFi will ultimately replace banks unless its services are user-friendly and accessible to non-technical individuals. Moreover, DeFi must become safer and more convenient to gain mass adoption.
Central banks have evolved over thousands of years, improving with each iteration. Therefore, given the current pace of industry development, I don’t think DeFi will challenge or disrupt core banking functions over the next decade.
Frank Fan: Do you think the pace of DeFi’s development will change?
Agostino: The speed of DeFi’s development moves in tandem with its regulatory frameworks and policies. Accelerating the design and refinement of regulatory systems can build trust among general and non-technical users, deepen public understanding of digital currencies, and thus effectively accelerate DeFi’s mainstream adoption.
Frank Fan: You mentioned the industry should eliminate non-value-driven digital assets. What is your definition of value-driven?
Agostino: The core driver of value is user demand for a service or product. Using the automotive industry as an example, Honda addressed people’s need for personal transportation within their economic means. From a transactional perspective, Honda delivers tangible benefits and value to customers who pay for its vehicles.
Web3 projects possess such potential—DEXs and zero-knowledge proofs are good examples—but most current projects fail to deliver genuinely valuable products or services. I believe time will filter out value-driven projects, while those lacking value will eventually exit due to declining user interest. This is an internal market adjustment process.
Frank Fan: From a macro perspective, who are the ultimate winners and losers in the transition from Web2 to Web3?
Agostino: Winners will be projects that design innovative assets, deliver valuable services, users who adopt these services, and (unfortunately) bad actors who successfully execute scams. There’s a project in Kenya providing financial products and loans to farmers excluded from traditional banking due to credit history—a win-win case.
Losers include most gamblers and fraudsters. As Web3 innovates and evolves, speculators and hype-chasers will lose arbitrage opportunities and gradually exit. As transparency and efficiency increase in Web3, large intermediaries based on Web2 may also become losers.
Frank Fan: Which applications or infrastructures could trigger the next bull market? What kind of products or services could drive mass usage and transactions? What foundational infrastructure is currently missing?
Agostino: The core issue lies in a problem faced by DeFi exchanges: “over-transparency.” Transparency is a foundational principle of blockchain, yet excessive transparency deprives users of arbitrage opportunities during transactions, thereby limiting trading volume to some extent. I believe solutions that allow users to protect transaction privacy—similar to zero-knowledge proofs—while ensuring miners/validators retain benefits from verifying transactions could drive broader DeFi adoption and spark the next bull market.
Current innovations like Flashbots and private transaction channels partially address over-transparency issues. Dark Transactions can effectively solve privacy concerns by allowing users to submit orders directly to validators, bypassing the blockchain mempool. Flashbots have been widely adopted by Ethereum users since mid-2021 to enhance transaction privacy. However, these methods, while protecting user privacy, eliminate arbitrage opportunities for miners, undermining ecosystem sustainability. In summary, existing solutions have not yet fully succeeded in simultaneously protecting both user privacy and miner incentives. If an application or mechanism emerges that safeguards the interests and privacy of all participants in the DeFi ecosystem, DeFi could achieve much broader adoption, potentially triggering the next bull market.
Frank Fan: Is it possible for governments or state funds to participate in or inject capital into the digital asset ecosystem to accelerate technological development?
Agostino: Currently, due to lack of regulation, government and state participation remains limited. In the future, if the digital asset industry establishes robust incentive mechanisms and enables automated governance participation by governments, the general public may begin holding digital assets, generating massive transaction volumes.
This requires prior understanding and trust from government institutions toward the digital asset industry. Before governments consider investing in the crypto sector or integrating it into existing economic systems (e.g., taxation), they must develop sufficient confidence.
Current conditions in the crypto industry—including risk mitigation practices, DeFi self-governance, and incentive structures—are insufficient to build such trust. Therefore, the industry must continue evolving and embracing regulation to reach a point where governments feel confident participating—an important catalyst for compliance.
#Postscript
Professor Agostino offers visionary insights, recognizing the technological and financial value of innovations like crypto and DeFi, while also providing practical recommendations—from regulation to industry development—addressing current challenges and bubbles. He expresses strong confidence in the industry’s future and offers invaluable guidance for Arcane Fund’s investment themes and directions.
This interview marks the first in-depth exchange between Arcane Labs and Columbia University’s Center for Digital Finance and Technologies. Going forward, both parties will collaborate across industry research, technology analysis, and project evaluation. Arcane Labs will provide the Center with deep industry data, Asia-Pacific market intelligence, and the latest industry developments. Meanwhile, the Center will deliver objective, in-depth, and rational academic analyses and research reports based on global innovations in digital finance regulation, technology, and business models—jointly promoting deeper integration between industry and academia, and facilitating dialogue between Western scholarship and Eastern markets.
Disclaimer
All market analyses and content above are for reference only and do not constitute investment advice or decision-making basis for any individual. Please do not make investment decisions based on this report. The authors and Arcane Labs assume no responsibility for users’ investment outcomes. No endorsement of any mentioned assets is implied; trading based on this information carries inherent risks.
Certain statements in this article may represent the authors’ forward-looking assumptions and projections. Known and unknown risks and uncertainties may cause actual results, performance, or events to differ materially from those expressed in these forward-looking statements. Under no circumstances do the authors guarantee against losses or promise minimum returns to readers.
📙 Interviewer:
Frank Fan, Partner at Arcane Fund, Founder of Arcane Labs, former senior executive at Huobi and Microsoft, alumnus of Tsinghua and Columbia Universities, dedicated to exploring new business models and technological revolutions, advancing the broad application of Web3.0, primarily engaged in investment, incubation, strategy, and management. Twitter: @MetaLouis66
About Us
Arcane Labs is an emerging Web3.0 research, investment, and incubation platform committed to frontier exploration of industry infrastructure and native applications, building incubation and ecosystem collaboration platforms for Web3.0 entrepreneurs globally. Insightful globally, empowering Asia.
📬 Contact Email: [email protected]
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