As the world recovers from the effects of the pandemic, the benefits of DeFi have been made abundantly clear. It is unlikely traditional forms of finance and currency will be abandoned anytime soon, despite our move to a cashless society, but banks and enterprises must consider a digital route into DeFi in order to stay relevant in the future.
Ian Kerr is the Director of Business Development for Episode Six. Ian has over 30 years’ experience in financial technology in a range of organisations starting with NCR and including IBM, payments and banking solutions providers. Prior to joining Episode Six, Kerr was the CEO at Bolero, a Software as a Service platform for global trade where he led new initiatives in digitisation, Supply Chain Finance and logistics. Earlier in his career, Kerr was the COO at a payments gateway company and led a payments focussed testing solutions division at Clear2Pay.
With his wealth of expertise, Kerr explains why crypto and DeFi isn’t just a fad or craze – but something that will remain for a long time, and if banks and companies do not tailor to it, they will suffer in the future:
During the Money2020 conference this week, cryptocurrencies and digital assets are set to dominate the discussion agenda. The banking industry – neobanks and financial institutions (FIs) alike – has an enormous opportunity to take advantage of the rise of digital assets and must leverage this new asset class to remain relevant in the transformative era of decentralized finance (DeFi).
To adapt to this massive paradigm shift, FIs must embrace new financial technology. The crypto race presents a historic inflection point for banks — legacy and digital — to integrate payments technology and survive, or face the consequences and fade as their business models present limitations.
Tectonic Shift Towards Crypto
Despite total cryptocurrency market cap plummeting over 50% from its $2.5-trillion peak in mid-May, as traders took profits in the lead-up to the Coinbase IPO, institutional money has continued to flow into digital assets undeterred.
Just how much money has poured in? Try north of $17 billion through June of this year alone, according to Bloomberg reports. The broader market cap, of some 11,866 digital assets tracked by the industry, has now recovered 80% of its value since the top in Mid-May, or just over $2 trillion.
While the vast majority of these so-called altcoins are largely used for speculation, investors remain attracted to digital assets both as a peer-to-peer (P2P) medium of exchange and as a store of value for a rapidly developing decentralized economy.
Broadly, the macro tailwinds for this tectonic crypto shift are inflation and the rising digitization of payments, with an emphasis on mobile transactions. To the former, trillions in pandemic stimulus spending has pushed the dollar downwards, losing four per cent of its value since last year.
As for the latter, a recent report from Allied Market Research forecasted that the eight-year trajectory for the global mobile payment market will register a 30% CAGR, hitting $12.06 trillion by the conclusion of the reporting period in 2027.
Forging Past Fiat?
A recent Deloitte Blockchain Report that surveyed leaders from across the finance and tech industries found that 76% think that crypto would replace fiat in 5 to 10 years. Attracting primary interest from investors are the two most capitalized cryptos, Bitcoin and Ethereum, along with so-called ‘stablecoins,’ which as their name suggests, are programmed to maintain stable value.
Bitcoin and Ether comprise roughly 40% and 20% of the market, respectively. Ether runs on the Ethereum blockchain which provides the critical rails for the decentralized finance (DeFi) industry. In the digital age, the key advantages offered by bitcoin are reduced transaction costs, fully transparent auditability and traceability of fund flows across blockchain ledgers, and pseudonymous, encryption-based payments to safeguard user privacy.
However, crypto faces challenges too. For one, regulators worldwide are increasing oversight of digital compliance and market conduct. Unlike fiat, digital assets – outside of China – are currently not issued by central authorities. This hurts the perception of its credibility. There is also the issue of volatility driven by the speculative nature of its trade, especially on OTC markets.
Therefore, while 81 countries (representing over 90 per cent of global GDP) are now exploring a crypto-based digital currency, not all are jumping on the bandwagon just yet, according to the Atlantic Council,
In this transformative climate of central bank money-printing and fiat devaluation worldwide, everybody from VCs, hedge funds, family offices, wealth management firms, private equity shops, corporate treasuries, lenders – and – even central banks – are betting big on distributed ledger technology (DLT).
But it’s not all or nothing – crypto and fiat must co-exist. Without international coordination and a standard, the financial system will face a significant currency exchange problem.
Building a bridge to crypto
New technologies enable these enterprises to take advantage and execute successful blockchain transformation projects and revamp their last-leg legacy systems on the path to crypto-integration.
In addition to established institutions, cloud-native neo-banks and other early-stage fintech platforms are obviously looking to implement DLT rails – assuming they haven’t already. ARYZE, which offers a government-backed Digital Cash, is one such example. Their CEO Jack Nikogosian believes there is an urgency to implement financial solutions that are truly inclusive, and that the technological transformation of payments and finance will disrupt traditional business models.
In order for enterprises to execute a successful blockchain transformation project and revamp their last-leg legacy systems, they need to leverage new technology to help shepherd them along the complex path of crypto-integration.
The rise of crypto and DLT marks a convergence of new shared technology for traditional banks and neobanks – a subsector that has traditionally been viewed as a competitive threat. But as banks modernize their tech stacks and challengers look to reach profitability and expand their offerings, choosing fintech integration will benefit both of them.
Institutional commitment to digital transformation will ultimately enable the financial ecosystem to evolve for the better. For example, new core ledger solutions help neobanks to focus on driving the digital cash (stablecoin) propositions, taking care of required transaction processing and reconciliation.
The Future is Here
As the pandemic continues to drive mobile and contactless payments, and fiat increasingly loses its luster, crypto and DeFi are no longer financial trends. They have become digital gold in today’s transformative metaverse that used to be called the future.
The future is here. Legacy lenders and fintechs across the spectrum need to get with the program. But in order for any aspirant’s blockchain transformation initiative to succeed, they need the right decentralized transaction processing technologies to bridge the worlds of fiat and crypto.