Why banks should get into decentralised finance

WITH crypto believers now contemplating a Bitcoin price of US$100,000 in the not-so-distant future, institutional newcomers looking to ride the digital asset wave should avoid being motivated merely by Fomo (fear of missing out). Instead, stakeholders in the financial sector - banks and investment firms included - should look to exercise foresight and consider the opportunities that lie ahead in the digital assets space.

Of these, many are likely to lie in decentralised finance (DeFi). Currently a relatively niche phenomenon in the crypto universe, DeFi arguably has the potential to revolutionise savings, investments, lending, borrowing, and virtually every other activity pursued in traditional finance. Its basic premise is similar to that of decentralised cryptocurrencies such as Bitcoin: middlemen and intermediaries in financial transactions cannot always be trusted, are prone to human error and fraud, and represent a potential point of failure.

They can generate inefficiencies and can, in the worst-case scenario, cause a transaction to fail. For example, a broker may have proprietary interests that conflict with those of its client, or a custodian bank can lose its client's assets due to improper safekeeping. These examples do of course represent bad practice rather than the norm, but maintaining governance safeguards against these scenarios in itself generates cost and organisational friction.