DeFi and its future

TechPassport interviewed 6 thought leaders in the field to ask for their perspectives about DeFi and its Future - Matthew Nyman (Counsel in the Banking & International Finance practice at CMS London), Sandeep Kaur (Founding Executive, FeeDi), Charles Kerrigan (Partner specializing, International law firm CMS),Jeff Hancock (CEO, Coinpass),Pradeep Singh (Leading Fintech & De-Fi market development, Capgemini), Helen Disney (Director, The Realization Group)  What is the difference between DeFi and TradFi? “The fundamental difference between DeFi and TradFi is the ability to transact without intermediaries, in other words, banks”, explains Matthew, while sometimes it is seen more as a cultural question; “where TradFi offers trust, size, and regulatory approval, DeFi brings innovation”, points out Pradeep. This seems to be the adopted view amongst our group of thought leaders, who see the biggest barrier to convergence to be that they see the world in such different ways. “Banks like the safety moat that costly regulation provides”, points out Matthew, “whereas DeFi developers want to innovate by setting up new business models, not just by copying banks but with newer tech”.  Are TradFi and DeFi competitors? Although he doesn’t see them as current competitions for one another, Charles tells us that it is inevitable that they will be at some point, although he doesn’t believe it will be for the same customers or even in the same way; “if the DeFi builders are correct, their economies will create new sources of revenue from the community, collaboration, and users owning their own data and content.  If that is correct there will be business models that TradFi has never financed.  If a large share of the online economy goes that way, DeFi has not displaced TradFi, it has jumped over it”. Understanding DeFi While none of those we interviewed argued that convergence is not happening, they all agreed that there are a number of factors impacting the pace of change, not least a lack of understanding of these technologies at senior levels of business and within policy-making circles.  So what is it that cannot be understood? For a start it’s a case of classifications, for example cryptocurrency is not currently recognised by the law as money and since financial services deal in money and DeFi deals in cryptocurrency, there is a legal gulf between them. What isDeFi is solving for the financial services?  This is a bit like asking what problems Uber solves for black taxis”, explains Matthew, “but that would be a massive understatement. It is possible that the true answer to this question is none whatsoever”. While this may be true and only time will tell, there are many who hope and believe that DeFi will solve many of the long standing issues associated with TradFi, in the same way the digitalisation of other industries has driven innovation. Sandeep believes that DeFi will promote social inclusion by giving financial access 24/7 to anyone with an internet connection, including the XXX of unbanked people in the world who will now be able to access ‘banking’ for the first time. Pradeep agrees, saying “Accessibility, Security and Reliability will be the pillars of DeFi that will take it forward in the future of money and make banking inclusive”. With the promise of social mobility and greater reach of people it is no wonder that TradFi now want a piece of the action. Pradeep believes that with each having their own positives that collaboration is the key to both their successes;“TradFi & DeFi will together provide alternate models of low cost financial services to billions of people around the world. Is it safe? This is a common question around DeFi, with many saying that the only way to keep its safe is to ensure that all technology providers offering financial products should be subject to the same rigour and regulation around transparency, capital adequacy and risk exposure as traditional regulated firms. Helen points out that“like any new and emerging technology, DeFi applications are also relatively untested and therefore carry the risk of unforeseen problems and consequences including fraud and hacks, where users stand to lose all of their funds”. She goes on to say that forming a “predictable regulatory regime will be key to accelerating the convergence of traditional and decentralised finance as well as to further investment in this transition”. What would regulated DeFi look like? “This question presumes that DeFi can be regulated, but that is not at all obvious”, says Matthew, “It is possible to legislate against certain DeFi activities, but such legislation is extremely difficult to enforce. The custodians of the financial services system are right to see stablecoins as the threat vector from the world of cryptocurrency/DeFi; they are possibly the only systemic point of connection. Stablecoin issuers are also perhaps the only DeFi actors that are inherently susceptible to regulation to enforcement of the law since they must identify themselves to financial services providers in order to transact in money.  It is difficult for proponents of DeFi to argue sincerely against the regulation of stablecoins.” While many see the development and growth of DeFi having occurred entirely in the absence - or perceived absence - of any regulation, and believe that imposing one now could stagnate its success. Others argue that with the regulation, DeFi will gain more trust from an operability perspective and therefore more adoption. Only time will tell…