The Banking Executive Magazine - May 2022 Issue

Will DEFI Take Over Banks? WHAT IS AND WILL IT TAKE OVER BANKS? INTRODUCTION Decentralised Finance DEFI is threat- ening the future of banks. This article overviews DEFI, its historical evolu- tion, its various technologies, appli- cations, and ecosystem. Following this overview, the article establishes a comparison between Decentralised Finance DEFI and Centralised Fi- nance CEFI. The article presents the opportunities and risks of DEFI, and DEFI regulation framework. The arti- cle analyses DEFI global impact and reflects on the future of DEFI. The ar- ticle concludes with recommenda- tions for Arab banks to build capacities to get around with DEFI complex technology and leverage the opportunities brought by decen- tralised finance whilst containing risk and avoiding misuse. WHAT IS DEFI? DEFI stands for Decentralized Fi- nance, a blockchain-based form of finance that does not rely on central financial intermediaries to offer serv- ices. Instead, it utilizes smart con- tracts on blockchains. A smart contract is an automated code that runs on the blockchain and cannot be changed. Transactions happening in a smart contract are processed by the blockchain without any third-party intermediary. As such, DEFI is a collective term for financial products and services, built on blockchain technologies, in the public blockchain space. It is an open and global financial system. DEFI promises greater control and visibility and gives wider exposure to global markets and alternatives to local currency and banking options. With DEFI, there is no centralized authorities who can block payments or deny user access to anything. the BANKING EXECUTIVE 8 ISSUE 161 MAY 2022 BY DR SOHA MAAD