In recent times, decentralized Finance (DeFi) has become a hotbed of new investor activity, yet increasingly, it is also facing mounting interest from regulators curious to understand and incorporate its benefits. This article takes a look at what DeFi is and what its implications are within the global banking and finance mix.
Generally speaking, decentralized finance (DeFi) is a concept emerging from blockchain utility, which uses decentralized ledgers of information to remove any prior reliance on central banking authorities, KOSEC CEO Michael Kodari explains. Operating through its own dedicated and decentralized community of processors, a blockchain DeFi project provides immutable security and fast transaction ability to its network of users.
By ‘removing the middlemen’, DeFi protocols confer a higher degree of efficiency when it comes to transacting value. DeFi also confers greater transparency for financial transacting and holds the potential to enable greater access to financial services among the 1.7 billion people without bank accounts.
DeFi risks and challenges
As a relatively nascent technology, blockchain ledgers have raised questions as to whether the anonymity it provides would serve only to attract illegal activity. Similarly, a DeFi protocol would also present as a platform through which dubious financing could be carried out without a central authority to vet against it.
As an exciting and novel idea, DeFi protocols have seen a rapid uptake among cryptocurrency investors and enthusiasts. However, this interest has garnered just as much attention from market regulators, especially in the case of national bans on cryptocurrency trading, as seen within countries like India and China.
The ideal solution
Apart from the issues of security and legal compliance, issuers and lenders within traditional finance have yet to embrace and leverage the many objective benefits brought about by blockchain ledger technologies.
Among such benefits include providing a marked degree of transparency and efficiency, as compared to traditional finance methods. To dig into this concept deeper, DeFi removes the need for intermediary processing, which otherwise focuses on tasks like background checks, application vetting and other anti-laundering procedures. Instead of requiring final approval from loan managers and bank employees, any similar transaction occurring on a DeFi protocol will simply be validated by authorized nodes on its network.
This ability to maintain transparency through its network has been touted by some as the ‘ideal solution’ to ensure regulatory malpractice can be rooted out — thus preventing market calamities like the 2008 global financial crisis from happening.
The numbers don’t lie. According to a detailed report, the leading accounting firm recognizes growth in DeFi from just under US$1 billion in June 2020 to over US$98 billion in September 2021. Among the types of projects that continue to enable such staggering growth include crypto derivatives trading, and yield farming platforms, which allow users to pursue profitable gains either through active market trading or by passively ‘staking’ the value of their tokens to earn interest over a term.
It’s no wonder there is such increasing interest in the DeFi space by regulators such as EY and the attention that it is gaining among institutional bodies globally.
The future of DeFi
DeFi presents a revolutionary new frontier when it comes to opening fresh opportunities in improving the global finance markets. From a utility perspective, its technology alone presents improved speed and security to facilitate financial transactions — internationally. This use case alone is a highly-developed feature that sees constant pursuit of uptake and improvement by popular cryptocurrency projects such as Stellar (XLMUSD).
Additionally, DeFi sets a fascinating new precedent for which access to financial services is enabled. While bank accounts are the expected norm within most developed societies, the World Bank estimates that up to 1.7 billion people globally do not have access to an account of their own. As a result, the emergent term within discussions around DeFi, sees its examples championed by those in favor of how it stands to enable access among users who don’t transact via traditional bank accounts, now commonly referred to as the ‘unbanked’.
As the concept continues to evolve, the question of how DeFi can be regulated will no doubt continue to be a pressing topic globally. A key example of how this conversation is taking place is in the current World Economic Forum’s digital currency governance consortium.
While such a growing call to regulate and integrate this new technology into existing financial practices might dampen the red hot interest many enthusiasts keep for DeFi projects, it could also stand to provide a greater outcome as it enables greater global access to basic financial services.
Michael Kodari, CEO of KOSEC - Kodari Securities
Michael Kodari is the Founder and CEO of Kodari Securities (KOSEC), a leading provider of investment services to a substantial and diversified client base, including corporations and ultra high net worth individuals. With over a decade of experience in funds management and stockbroking, Michael has worked with some of the world’s leading value investors and financial institutions. A philanthropist and a prominent expert in the stock market, CNBC Asia has referred to him as “the brightest 21st century entrepreneur in wealth management”.
KOSEC – Kodari Securities is a leading provider of investment services to a substantial and diversified client base, including corporations and ultra high net worth individuals. Established in 2010, KOSEC exists to empower and equip investors with the best investment opportunities, knowledge, tools and resources, as well as providing the highest level of product/service offering to help them make better and more informed investment decisions.
Find out more at https://www.kosec.com.au/