Decentralised finance: What happens next?
Decentralised finance (DeFi) is making moves
Welcome to our write-up of the decentralised finance 2023 trends from the brilliant Future Today Institute (FTI). Their research has been downloaded over 1 million times, so we always pay close attention.
Financial technology is built on secured distributed ledgers, and Defi uses crypto and blockchain applications to deliver products and service experiences. But in light of the Crypto winter in May 2022, what’s its future?
We cover the top trends from a product and service innovation perspective.
1. Stablecoins take a hit in 2022 but still have potential to be a foundational cryptocurrency
The DEFI system is complex, and the market is recovering from previous crashes. This industry relies upon capital backers, and investors moved assets backed by US reserves during market turbulence.
In 2022, the US Senate introduced the TRUST Act to regularise stablecoins usage and bring greater regulatory scrutiny. If Trust is rebuilt, the reward is a greater market cap for stablecoins.
Why this matters: This legal framework signals greater asset stability. However, for ‘mainstreamification’ to happen, Government must dictate what makes these tools safe, which might vary depending on the instrument, e.g. CBDC versus a Doja coin. Better regulation and guardrails are required to be accessible to the general public. Better consumer education is also crucial.
Ask: What proportion of your users are using or likely to adopt cryptocurrency? How does this shift the relationship and value exchange? Is this right for your business?
2. Central bank digital currencies (CBDCs) have promise but will take longer to scale
Progress is happening, but CBDCs may take longer to scale due to organisation type.
The Bank of England is building a digital wallet, app, website and server that can connect APIs. Expected to be launched in 6 months. In Spain, banks are testing how a digital Euro would work within the existing payment system.
FTI predict it will be at least 2-3 years before we see a CBDC in action. It’s not a technical but a values-based issue, e.g. does the country’s institutions have the infrastructure? The Caribbean is the closest. The US and Europe are behind due to a lack of maturity and willingness to experiment.
The Atlantic Council track CBDS developed across the world.
Why this matters: A successful CBDC can improve financial inclusion, especially for underbanked populations, introduce competition and resilience and improve transparency in money flows.
Ask: How might a CBDC affect how customers pay and exchange value for your organisation?
3. Will cryptocurrency replace traditional banking
Cryptocurrencies like Bitcoin and Ethereum are far from replacing the USD and EUR. They could dominate in certain use cases, e.g. industries with large global transactions, but different regulations result in tension because they can’t make transactions seamless.
They also lack the speed and price per transaction to compete with traditional settlement networks like Visa. Energy intensiveness is another criticism. The White House reported that electric usage is more than in most countries. Whilst innovators are working on it. Many governments, such as the EU, have banned crypto mining.
CBDCs have the potential to replace cash over the long term. However, work is needed on the underpinning systems work for a successful transition.
In the meantime, traditional financial services firms understand the current ecosystem, share detailed knowledge with regulators and lawmakers, and ensure the law covers the right things.
Why this matters: This is a new space, and lawmakers can’t be an expert on everything. Regulation is needed to avoid control being weighted towards the whales. Anticipate partnerships between settlement mechanisms and cryptocurrencies to scale.
Ask: How can we play a leading role in developing these technologies?
4. Tokenisation will make social and digital payments more secure and streamlined
The increase in social and conversational commerce means companies must prepare for new forms of value exchange.
Conversational commerce and chat-based systems are enablers. Examples are Stripe which enables chat payment functionality. CBDS and stablecoins could also be used.
Consumer backlash is something to watch out for. Social interactions are not tracked, so companies must balance enablement without being intrusive.
Why this matters: The payment mechanism will change the most. Today, a user knows the payment has been made. The next iteration of APIfication means the payment will become more invisible; the algorithm is learning when to purchase.
Ask: Is your firm present where customers are considering products? How can you make the transaction secure and invisible in social interactions?
5. Digital wallets become a little more predictive
Accounts will become more connected, so the wallet can predict and make semi-autonomous decisions based on specific transactions based on factors like risk tolerance, age and goals. This predictiveness will foster better decisions, e.g. Robin Hood making investment accessible.
The wallet is part of your bank but might have different interfaces depending on usage—a desktop versus a mobile application.
Why this matters: It’s easier for a large bank to add crypto, so this needs to be resolved at an institutional level. Technology needs to be developed to democratise the playing field.
Ask: How can we embed cryptocurrency options within a traditional account, foster experimentation and help?
