DeFi is real no matter what happens to the cryptocurrency

In Jamie Dimon’s annual letter to JP Morgan Chase shareholders, he explicitly stated that “DeFi and blockchain are real“, which caused comments in cryptocurrencies given his previous statement that” I do not care about bitcoin. I have no interest in that. “But I think it is possible to believe that tokenization will be huge and that defi protocols will play a serious role in the next generation of financial services, while being skeptical over that cryptocurrencies will play a major role.

DeFi without Bitcoin? Opinions are certainly divided, but when it comes to the ongoing entertaining discussion between Marc Andressen and Jack Dorsey, I’m on the Andressen side of the fence. It is not at all clear to me that Bitcoin
BTC
is the universal, utopian currency of the future, as I believe that the ongoing experiments in the DeFi world will eventually open up new ways of doing business in the financial industry.

I do not see it as a controversial position. In fact, I think this has long been the perception of serious players in the mainstream financial services sector. Irfan Ahmad (VP of State Street, the world’s largest custodian bank) recently said that cryptocurrencies have not just entered another winter, but a “polar vortex”, Which seems to be a reasonable opinion in view of the collapse of Celsius’ decentralized finance (DeFi) protocol and the news that Three Arrows Capital has filed for bankruptcy, etc. But under the ice, his investment bank and others are working to use shared ledge technologies to create new trillion-dollar markets that do not involve speculative cryptocurrencies, but instead use digital representations (i.e., tokens) linked to real and lasting assets.

There is no paradox: Whether cryptocurrencies survive the next regulatory storm, central banks’ digital currencies, instant payments, and digital identity, institutional markets will eventually use the new infrastructure to trade bonds. , gold and carbon in digital form. It will not only be commodities that are tokenized and traded without clearing or settlement. Banks will symbolize all forms of security, such as deeds, using technology. As the Bank for International Settlements (BIS) stated in its current Bulletin (# 57, June 14, 2022), “DeFi lending must engage in large-scale real-world asset tokenization unless they do not wish to remain a self-reference system. driven by speculation.

Tyrone Lobban (Head of Onyx Digital Assets at JPMorgan) spoke at Consensus 2022 last month. described in detail the bank’s DeFi plans of institutional quality and emphasized the value of tokenized assets waiting behind the scenes. He said tokenized assets ranging from US government bonds to fun money market stocks could all be used as collateral in DeFi pools, bringing trillions of dollars of assets into DeFi, “so we can use these new mechanisms to exchange, borrow [and] loans, but with the extent of institutional assets.

Real innovation

It will be a whole new sector of financial services and it will be an important sector. Since, as The Economist pointed out, tokens can be digital representations of just about anything, “they can be effective solutions to all sorts of financial problems.” Apart from everything else, tokens mean a trading environment with lower costs, which is why big players want to use them as soon as the regulatory environment is stable.

As Thomas Zschach, Chief Innovation Officer at SWIFT, get it: “Financial institutions today generally do not engage in digital assets without permission due to their unregulated status and anonymity … But many financial institutions, central banks, market infrastructures and others, including SWIFT, are experimenting with digital assets – especially CBDCs and tokenized assets. ”

Why? Well, SWIFT says it’s about uncovering new opportunities to increase efficiency, reduce costs, encourage financial inclusion, and continue to bring more value to their communities. It is not a uniform perspective. That is why forward-looking financial institutions look: Not because of ideology, but because of money.

The emergence of institutional DeFi will require digital identity infrastructure due to the need for KYC, etc. in legitimate markets. It has already started to happen here and there (for example in Aave
AAV
Arc), but we need a large-scale identity infrastructure if we want to connect DeFi with the “real world”, so to speak.

I was so lucky to have Tyrone on my digital identity panel at Money20 / 20 in Amsterdam last month. He is a caring guy and I take his point of view very seriously. His view is that the way forward is to use building blocks for digital identity such as W3C Verifiable Identifiers (VCs). I must say that I completely agree with his view, VCs are the key to large-scale solutions, and that “since verifiable credentials are not stored in the chain, you do not have the same overhead to write this type of information for the blockchain, payment of gas taxes, etc. .

Take effect. And they have another important advantage: confidentiality.

see clearly

Transparency is one of the main reasons why we should all want to see a renewed and reinvented financial sector. Look at some of the recent problems in the financial world, such as the collapse of Wirecard. Corporate accounts included assets that simply did not exist. Given that auditors, regulators, and the board have not been able to prevent large-scale crime here, it is reasonable to wonder whether the technology may be able to do a better job. Well, I think the answer is yes, and I think tokenization is part of a coherent view of how it can do that: If I claim to own a thousandth of the Mona Lisa, it’s easy for you to verify on the digital asset platform to see that the thousandth Mona Lisa token is in my wallet. You do not have to rely on accountants or other intermediaries.

As seen in the current crypto-cryogenic polar winter vortex or whatever its current name is, DeFi has significant benefits. Arthur Hayes notes with precision that DeFi protocols control some colossal lending books with completely transparent lending standards, counterparty addresses and liquidation levels. Observers can continuously assess the health of these books. Depositors can process all relevant health information from the various protocols before tying up their funds. And when the value of the security falls, it is automatically liquidated so that there is no loss on receivables.

However, transparency does not mean that everything has to be visible to everyone at all times. Wharton School last year published an article on “DeFi Beyond The Hype,” which noted that there may well be some tension between increased audibility and transparency of shared ledgers and stakeholder privacy. One thing is for me to be able to look at your loan portfolio on a shared ledger somewhere to determine if you are creditworthy, another thing is for me to know who your counterparties are.

Business can not work like that. Secrecy is essential to trade. Not only is it important for companies to protect the privacy of their customers and suppliers, but they do not want to reveal their strategies to their competitors. Anonymity does not work for markets, but complete transparency does not work for participants. What is required is not the anonymity of the permit minus the blockchain, but privacy in a well-regulated environment, and that when verifiable credentials are provided. Within the right framework of trust, it is easy to present credentials that say I am a U.S. citizen, over the age of 18, and have a brokerage account (for example) without telling the world who I am.

(If I do not do something good, the providers of such important attention will, of course, hand over my true identity to law enforcement.)

We thus arrive at a link between DeFi, verifiable credentials, and privacy-enhancing governance structures, which is the potential place for a kind of Big Bang in the financial world: the creation of a new universe of financial services.

That is why I ultimately agree with Richard Turrin who wrote this there is an immediate need to “fix the endemic corruption, fix the DeFi protocols that encourage exploitation, fix scams and fix the culture of greed”. and Lisa Wade who says “Once regulated, it will be important to have knowledge of portfolio management to bring these new asset classes into the portfolio.”

They are certainly right that DeFi will change financial services for the better.

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