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As is often the case with the emergence of innovative technologies, the technological manifestations do not always meet the inventor’s expectations.
Is True DeFi Real? Only Time Will Tell
For example, Tim Berners-Lee seems to want people to forget Web3 and blockchain because the currently hyped version falls short of his Web3 project’s goal of returning the Internet to its original promise. .
The same seems to be happening with decentralized finance (DeFi). The concept of decentralization is not new, but it gained a lot of attention after the financial crisis of 2008, especially after the release of his Ethereum protocol in 2015. DeFi is now widely hailed as the next big evolution in finance.
Decentralized finance pioneers may wonder if the adoption of the DeFi concept by institutional investors, central banks, regulators and centralized utilities is a salvation or a wake-up call for market participants. .
To many, integrating the concept of DeFi into a centrally regulated traditional finance (TradFi) ecosystem must sound contradictory. This is in stark contrast to the ideas of the inventors who had the vision of creating an alternative decentralized financial system without flawed top-down governance and control by central banks and policy makers.
Nonetheless, there are many opportunities for DeFi to positively impact all stakeholders by helping develop a token-based economy and innovate in centralized finance (CeFi).
In recent years, DeFi has become a complex ecosystem spanning infrastructure services, protocols, different sectors, regulated technologies, new contracts, and asset types supporting different delivery and service models. While the cryptocurrency, NFT, and metaverse markets have suffered significant declines for most of the year, TradFi’s institutional backers continued to announce and deploy new services in the crypto and digital asset space.
DeFi institutionalization is driven by major international financial institutions and asset managers, but also by smaller companies supported by regulators and industry associations.
The increasing momentum can be demonstrated by the numerous research, experiments and pilot projects being carried out by central banks with the BIS Innovation Hub, the European Central Bank (ECB) and banks under other initiatives.
The following example impressively illustrates the intrusion of decentralized approaches to CeFi.
project mariana: SNB, together with BIS Innovation Hub, Banque de France and Monetary Authority of Singapore (MAS), will use DeFi protocols to create an automated market maker for cross-border exchange and settlement of fictitious Swiss francs and euros (AMM) is investigating. , and Singapore dollar wholesale CBDC.
project orchid: MAS is investigating the potential uses of the Digital Singapore Dollar (SGD) for a limited purpose and the necessary supporting infrastructure. This is not a CBDC, but privately issued Purpose Bound Money (PBM), i.e. money (such as government payments and vouchers) programmable by smart contracts on a distributed ledger (DLT).
Project Guardian: A joint initiative with market participants led by MAS to test the feasibility of applications in asset tokenization and DeFi while managing risks to financial stability and integrity.
Project mBridge: The Hong Kong Monetary Authority, the Bank of Thailand, the People’s Bank of China, and the UAE Central Bank have conducted pilots to support real-time, peer-to-peer, cross-border payments, and foreign exchange transactions using CBDC.
project icebreaker: The central banks of Israel, Norway and Sweden are working with the BIS to explore retail CBDCs for international payments.
Project Cedar: The New York Fed has completed an experiment (Phase 1) focused on the potential of CBDCs to become a viable option for large-scale foreign exchange trading. This experiment has reduced clearing and settlement from the current average of 2 days to less than 15 seconds.
Commercial Bank Money Token (CBMT): DZ Bank, which is supported by three other large German banks, popularizes CBMT. A CBMT should have the same characteristics as traditional book money, be deposit-insured as a site deposit, and at the same time allow programmable transactions between companies and machines, for example. .
First Dual Listing Digital Bond Issuance: UBS has issued its first publicly tradeable digital bond, listed on the traditional SIX stock exchange and digital asset exchange SIX Digital Exchange (SDX).
Abrdn, a UK wealth manager managing over 500 million, recently invested in a London-based regulated digital platform. Arcus.
Despite their experimental status, these projects demonstrate that blockchain-based (cross-border) payments, issuance, and settlement of digital assets on distributed ledgers can be faster, simultaneous, and less risky. indicates that it is safe. The design of the distributed ledger system enables digital currency payments and digital asset settlements on a 24/7 basis. Interoperability between separate, homogeneous ledger networks of various financial and public institutions, including central and private banks, demonstrates the potential of an integrated digital economy.
So let’s take a look at the possibilities of digitizing private market assets.
According to BCG, the asset management industry will surpass $100 trillion in assets under management (AuM) in 2021. Some observers see this as a huge opportunity for digital assets.
An interesting investment area is growing private market assets, which are inherently long-term and illiquid asset classes. These so-called alternative assets are mostly issued and managed through myriad paperwork and manual processes that involve many stakeholders and require time and effort.
Capitalize in risky assets if investors can build a reasonable belief that capital inflows into these markets are likely to receive relatively positive returns despite the relentless uncertainty. Provide proof that you are ready and willing. Until recently, investors were institutional investors, high net worth individuals, and family offices. The next big wave of investors is likely to come from wealthy retail segments that have largely been on the sidelines as the private market expands. After issuing a letter in favor of private equity investment in contributory schemes, the democratization of alternative investments came close.
The cryptocurrency industry has paved the way by issuing and trading non-fungible tokens with native cryptocurrencies on centralized and decentralized exchanges. However, after the 2021 hype and the collapse of large market players, some exchanges are in dire straits with trading volumes dropping by more than 90%. Interestingly, this has not stopped the rather slow but steady progress of tokenization of financial assets. It shows the potential for significant growth in terms of assets acquired.
The asset management industry is beginning to see the benefits of digitization and is offering digital funds to investors. The underlying funds will remain the same, but will be made available in a digital wrapper. These new digital funds will enable greater transparency, better risk management, compliance controls and the ability to sell select funds to new investors. Digital funds are listed on various new digital exchanges, but also offer a huge market on existing stock exchanges.
Now that the B2C fintech boom has come to an end, pro-investor focused wealth tech companies in the pro space are taking off. The growing popularity and demand for private market assets underpins this trend for digital platforms. As pointed out in the Mercer 2022 Global Wealth Management Investment Survey:
Tokenization of private assets could prove its benefits and lead to higher adoption rates, without the regulatory uncertainty of native crypto assets and cryptocurrencies.
Alternative investment platforms that open up access to non-traditional assets such as private equity, real estate, art and cryptocurrencies to retail investors and their advisors will have a transformative impact on both retail and institutional investing. . Platforms such as Titanbay and Petiole Asset Management, as well as wealth and fintech companies such as GenTwo, Vestr, Stableton and Swisspeers, are in demand for a digital issuance, structuring and distribution platform that can be easily integrated into their current advisory processes and distribution. shows that it is rising. Channel.
Is adopting the concept of DeFi into a CeFi system with central governance on the right track? Whatever the answer, applying DeFi protocols to CeFi will help CeFi innovate. Scaling new technologies and approaches based on vast amounts of existing assets will help (re)create a robust and resilient financial market infrastructure.
Olaf Ransome recently wrote on LinkedIn: Not all shiny new things are better than TradFi. Design still matters. I need both new and old. The time of convergence will come.
The reality is that we will continue to live in a heterogeneous world where more systems coexist. Is true DeFi realistic? Only time will tell.
