As the outsized hype of decentralized finance (DeFi) from the past couple of years fades and international businesses explore new ways to utilize the underlying blockchain technologies, many can’t help but think: What’s next?
To shed light on this, the Converge podcast featured experts including Ian Horne, author of the forthcoming book Why DeFi Matters, Micky Tesfaye, content lead for Money20/20 EU, and Scott Johnson, Vice President of Technical Program Management at Convera.
The panelists review shifting global economic sentiment around central banks, the hurdles facing the DeFi industry, and where trust between organizations fits into a system built on the presumption of trustlessness.
DeFi solutions are here
Use cases built on the underlying DeFi technology are emerging across the globe, and these successes are spurring more adoption in the space. That’s the most exciting aspect of this stage in DeFi’s multi-decade evolution, as Horne outlines on Converge.
This summer, major financial players JP Morgan and PayPal each made great strides in their DeFi solutions with JPM Coin and PayPal USD (PYUSD), respectively. The largest U.S. bank by assets, JP Morgan, may deploy its DeFi product to corporate clients in less than a year. They enable fast, stable, and reliable cross-border payments for multinationals, and while a host of challenges still need to be faced, the positive results are starting to come in, Horne describes.
“I think there is an opportunity for assets being moved en masse from place to place. … I also see a big opportunity for treasury management and payment settlement,” Horne says. “I can see how you’d want to blockchain that process and ensure people reliably get paid.”
In need of regulation
Our featured experts all agree that economic sanctions and political motivations could slow the spread of worldwide DeFi once governments organize against the transfer of digital assets. However, broad standardization is needed to level the playing field and ensure a frictionless digital currency exchange moving forward.
“Cross-border transfers, for instance, sounds like a great area for this technology to work in, but it’s a heavily deregulated area — and it’s going to get more regulated with sanctions,” Tesfaye says. “And this kind of early political tension starting to emerge as well, that’s going to place more stringent restrictions on firms operating in that space.”
Still, there’s a hope that governments can use their influence to provide clarity, which would go a long way toward more DeFi adoption in the international business community. At present, the future is too uncertain for most to make a significant commitment to DeFi as a core practice.
“It’s still really early days,” Johnson says. “I don’t think there’s enough maturity or stability yet in this space for us to make a long-term investment into integrating these tools into our platform.”
This month’s G20 summit in New Delhi also included a review of recommendations for international DeFi, which underscores the magnitude of this movement as a global priority.
Generating liquidity, dispelling concerns
One encouraging sub-trend within the rise of DeFi is “tokenization” — the process of creating digital tokens to represent real-world assets — to provide more liquidity in the system. Distributed ledger technology (DLT) opens even more opportunities and solutions, but Horne warns it can also be used by bad actors.
“What people need to know if they’re investing in crypto or getting into it is what this actually looks like, what kind of version of decentralization they [have],” Horne says on Part II of the episode.
While the promise of a more democratized financial system is drawing many people in, Horne notes that nascent technologies can be opaque — and without due diligence, there are real consequences. “The key thing really is to analyze as much of this stuff as you can and try to understand what you’re getting into.”
Ready or not, CBDCs are coming
In episode three, Horne and Tesfaye return to take on the stickiest DeFi topic yet: Central Bank Digital Currencies (CBDCs). Throughout this final installment, they unpack the challenges — and possible solutions — to shifting sentiment around CBDCs.
This stage in the continuing evolution of DeFi is critical and the potential benefits are enormous. So are the risks — and not everyone is on board.
“It seems to spark quite extreme reactions in people,” Horne says, noting that 95 percent of the currency in the UK is now digital. In fact, most major economies, including 19 of the G20 nations, are in the end stages of developing CBDCs.
It all comes back to trust
With every transaction being digitally traceable — and possibly mandated as being so — people fear their privacy may be violated.
“Privacy is very much a human right and this could, if implemented a certain way, infringe on that,” Horne says. “You have to trust that your central bank and government won’t surveil you.”
Beyond the ability to see where exactly the money is flowing, there is also the matter of CBDCs being controlled by institutions to limit or deploy money against the will of the consumer.
“Programmable payments and programmable money is a thing that terrifies people. It could be programmed not to be used on certain products or stop working for you under certain circumstances,” Horne says. “The big concern is that if you can program money, you may lose control over your own assets.
Privacy versus security
The debate over how much freedom to give up in the name of safety is nothing new, of course. In the context of CBDCs, it centers on ledger traceability’s benefits for fraud prevention compared to the risks of centralizing currency and consolidating power.
According to Tesfaye, common standards and interoperability between CBDCs is crucial. But even with these developments, he notes that a full-blown take-over of CBDCs is unlikely due to factors like political distrust.
Privatizing digital currencies might not be the answer either, because many people are just as skeptical about big banks as they are about their governments. A more practical roll-out could be to limit the use of CBDCs to public transactions where there’s widespread desire for transparency.
“The fundamental issue is trust,” Tesfaye says. “It’s about making sure we create the right types of responsibility … between those who are creating frameworks for governing the financial system and those who are creating the actual products and tools we use.”
Want more insights on the topics shaping the future of cross-border payments? Tune in to Converge, with new episodes every Wednesday.
*The information shared on this blog is for informational purposes only and should not be considered financial advice. Please note that the opinions expressed on Converge are solely the opinions of the host and the guests, not Convera’s.
