DeFi cannot announce the independence of the bank


Independence weekend of course evokes freedom.

And before too long, we might be independent from banks, third parties, and the financial system itself. Or maybe not.

The promise of Decentralized Finance (DeFi) is that the advent of cryptocurrencies, and perhaps more importantly, blockchain, will eliminate reliance on traditional financial services players.

In a nutshell, third parties would not be involved in transferring money (or, really, anything of value) to users. It would eliminate banks, counterparties, currency brokers, pretty much… you name it.

Centralized finance, as it has taken shape over the centuries, concentrates and enables the activities that have become the foundation of our daily lives – borrowing and lending, of course, but also the transactions that provide us with goods and services. services.

It’s a feature that banks and other businesses are where we set up accounts, send orders, and generally give permission to act on our behalf. The orders – to draw on a current account, to make a transaction, to buy a bond – have come and still pass through the central powers (banks or central banks) and the stock exchanges.

The glue that binds

The absence of central authority, via DeFi, leaves only the app, the blockchain and the direct interaction between buyer and seller, or sender and recipient.

The key glue that binds the parties together in a transaction is trust. In the case of centralized finance, we trust the system, or the intermediary (like a stock exchange). In DeFi, it is technology, most obviously immutable transaction records, that instills trust.

But the massive abandonment of the centralized financial model will be slow to come, if it happens.

In a recent interview with Karen Webster, Jeremy Allaire, CEO of Circle, said that in order to evolve and mature, DeFi will undergo evolution. Regulators will make sure.

“The role of intermediaries [going forward] will be the key, ”he said. “In particular, as [decentralized protocols over blockchain rails] becomes more mature as an infrastructure for financial market activity and payment activity, regulators will want companies that are intermediaries to cover consumer protection and financial crime monitoring. “

Still room for intermediaries

In this way, intermediaries will continue to be present and help to cement trust. Interestingly, some of the most visible players in the crypto / DeFi arena are the middlemen. This is crystallizing in exchanges such as Coinbase and other companies where digital wallets connect.

The gathering points where buyers and sellers come to convert cryptos into each other, or even bring fiat into digital options (crypto), always need a third party. Fiat still needs this transformation, especially as companies like PayPal seek to increase consumer adoption of bitcoin and other crypto payments.

Interestingly, a number of countries limit the use of bitcoin (and its brethren) in other than speculation, if at all. China is the most visible country to tackle cryptos, with bans on the use of bitcoin in financial activities (or being served by banks and the like), and of course the elimination of miners continues. . Elsewhere, Turkey recently banned the use of cryptocurrency and associated assets as a method of payment.

Last month, Bank of England FinTech Director Tom sheep said a central bank digital currency (CBDC) could be “tens of thousands of times more efficient per transaction” than bitcoin. He noted at a conference last week that “bitcoin, given its underperformance and energy inefficiency, is by no means a relevant comparison for the kind of technology we might be using in a digital currency. central bank “.

And as reported by, Dan Berkovitz, Commissioner of the Commodity Futures Trading Commission, said DeFi acts as a “shadow financial market”, stating that unlicensed trading in derivatives would be considered illegal and is a “bad idea … there is no intermediary to monitor the markets for fraud and manipulation. , prevent money laundering, protect deposited funds, guarantee the performance of the counterparty or make clients harmless in the event of process failure. “

At the same time, the safeguards put in place around cryptos and various exchanges leave room for the development of CBDCs, which would of course be linked to the existing central banking system.

As independence from “CeFi” has been touted by some bitcoin enthusiasts who envision the decline of banks and other middlemen in the past, these hopes may prove more in vain than fireworks.



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