The state of banking and finance today presents a complex maze that even seasoned bankers find it difficult to navigate. Despite appearances, there is a method to this madness. As Nobel laureates like Muhammad Yunus and Joseph Stiglitz have warned in the past: the central bank, in particular, has transformed to keep the status quo in check. Or, in the words from Mike Maloney, specialist in monetary history and economics: it is “the biggest scam in the history of mankind”. Maloney explains that giving a small group of unelected individuals the keys to money printing will undoubtedly rot the purchasing power of workers’ savings, to the benefit of the few who benefit from inflation. asset prices.
In the wake of the global financial crisis and devastating banking operations around the world, individuals and small business owners who just want to keep the wealth they have earned are increasingly asking: Does my bank work for me or do I work for my bank? But, until recently, there was simply no alternative to central bank currencies, and no one could provide the services of commercial and investment banks.
Today, with cryptocurrencies and decentralized finance (DeFi) platforms on the scene, institutional banks are no longer the only players in the game. What was once the unchallenged, if not uncontrolled, power of institutional banks before the 2008 financial crisis crisis, is now up for grabs as thousands of new entrants compete to change the foundations of financial systems as we know them.
So what does this mean for the average person?
DeFi vs traditional finance
To dispel some of the fog, let’s compare DeFi’s advantages over traditional, centralized banking and financial services, from the perspective of individual business owners and small and medium-sized enterprises (SMEs).
In banking and traditional finance:
The individual takes the risk of lending his savings to the banks. Most banks use fractional reserve banking, which means if someone deposits $ 100, the bank can lend $ 90 and only needs to keep $ 10 at all times. Much of it is invested in complex financial instruments which can be highly exposed to credit defaults, as the 2008 crisis showed.
The purchasing power of the individual decline by default. The fiat money stored in the banks is attached to the monetary system, which can be devalued by inflation and currency depreciation. So if you put $ 100,000 in a bank account at the start of the year and the US dollar depreciates by 10% for the year, then at the end of the year your savings can buy 10% of less than before.
– Charlie Bilello (@charliebilello) December 18, 2020
Standard interest rates can be about 0.03% to 0.09%. But, if the currency depreciates by 10%, for example, then you are still down 9.91-9.97%.
There are often barriers to opening accounts and accessing certain banking services. Banks establish their own arbitrariness requirements such as loyalty, minimum balances (eg, $ 2,000,000), credit checks and access to banking services.
The data of the individual is traced and is technically the data of the bank, according to to Riley v. California, 573 US 373 (2014).
The range of financial products offered is limit. Loan applications are generally tedious and difficult to get through, excluding many of those who need them the most.
In comparison, in decentralized finance:
- Individuals have full control over their finances and can freely trade or even put their assets in cold storage for added security.
- Individuals can invest in a wide range of assets like Bitcoin (BTC) that are not pegged to the dollar and can act as an inflation hedge.
- Users can use their savings for themselves on DeFi lending platforms and trade digital assets like symbolic art. Although it is volatile, returns can range from 2% to 50,000%, with wagering options.
- There are fewer (if any) locked-in contracts to use the services – individuals can come and go as they please.
- There are no “bank charges”, although there may be gas charges like on Ethereum or currency exchange charges.
- Individuals can open anonymous accounts to exchange and store their wealth.
- Individuals can access better financial products like instant loans and took advantage of exchanges without long and complex approvals, using their crypto as collateral.
Related: Decentralization vs. centralization: where does the future lie? Expert response
Overall, the new benefits of decentralized finance are sure to give traditional banks value for money. Indeed, as analysts like Robert Breedlove suggested, according to the principles of Game theory, institutional banks will have no choice but to join the revolution to remain relevant. Even conservative fund managers like Ray Dalio and David Morgan have joined the movement, speaking publicly about adding cryptocurrencies to their portfolios. Most recently, United Wholesale Mortgage announced that it will accept Bitcoin for mortgage payments. And, with the announcement of the world’s first Bitcoin exchange-traded fund (ETF), the rate of adoption of decentralized finance within mainstream finance is expected to increase further.
It seems that decentralized finance has won its first battle. But, the war is not over yet. At the time of writing, up to 98 percent of world leaders surveyed to stay invested in the traditional banking system. Indeed, more than 127 trillion dollars of funds in the world are managed via banks and bank-centric payment gateways, while the market cap of cryptocurrencies is a paltry $ 2.2 trillion (less than 2%) by comparison. Suffice it to say that decentralized finance is still in its infancy.
Related: What got in the way of a pure Bitcoin ETF?
This means that for the next 10 years at least, there remains an important addressable market for companies looking to bridge the gap between new decentralized finance and old centralized finance. The driving force behind this growth is the growing regulatory acceptance of crypto and the availability of new tools that enable businesses to use crypto in a compliant manner.
First, major financial centers like Singapore now have clear licensing regimes for crypto companies. This allows crypto companies to operate with the same legitimacy as traditional financial institutions. Regulatory acceptance gives institutional investors and large multinational companies the confidence to conduct crypto transactions.
Second, there are now tools that allow businesses to manage their crypto payments in a compliant manner. For example, remote workers and business owners can issue and track invoices denominated in a currency, such as USD, and be paid in any other currency, such as Ether (ETH). This simplifies processes like invoicing, payroll, and crypto accounting.
So, although decentralized finance has not yet been adopted by the general public, two things remain certain for the individual. First, as the adoption rate of DeFi increases, the need for banks to compete with each other to win your business will also increase. Second, for the first time in history, you, as an individual, have more power than ever to profit from changing financial circumstances. This is perhaps the biggest victory of all.
This article does not contain any investment advice or recommendations. Every investment and trading move comes with risk, and readers should do their own research before making a decision.
The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Christophe Lassuyt is the co-founder of Request Network, an open source protocol backed by YCombinator offering a suite of blockchain-based financial products ranging from invoicing to payroll, expenses and accounting dedicated to crypto-first companies. Prior to co-founding Request in 2017, Christophe was working on other crypto projects such as Moneytis, making money transfers with crypto as the backbone in 2015. Christophe has built up extensive experience as a CFO working at internationally in North America, Europe and Asia. in various companies.