The Banking Executive Magazine - May 2022 Issue

nancial and banking services via blockchain technology. DEFI aims to build an open-source, permissionless and transparent finan- cial service ecosystem. DEFI VERSUS CEFI Traditional financial services such as payments, lending and borrowing were only available via established financial institutions and banks. But this has been transformed with the introduction of blockchain technol- ogy. When the concept of cryptocur- rency started expanding, the discussion has shifted to a new set of considerations involving decentral- ized finance (DEFI) and centralized finance (CEFI). Before DEFI was introduced, Central- ized Finance CEFI was the standard for trading cryptos. It handled a stronghold over the cryptocurrency industry. In centralised finance CEFI, all crypto trade orders are handled through a central exchange. More- over, the exchange identifies which coins they list for trading or how much fees traders need to pay to trade with their exchange. Centralized entities run CEFI services like centralized crypto exchanges. Most CEFI service providers tend to abide by regulations outlined by the local authorities where they operate. These regulations make it mandatory for centralized financial institutions such as exchanges and trading plat- forms to implement Know Your Cus- tomer (KYC) and Anti Money Laundering (AML) practices. The main idea behind a centralized exchange is that all the crypto trad- ing orders are routed through a cen- tral exchange in centralized finance CEFI. In Centralized Finance CEFI, users do not own their cryptocurrencies when buying and selling via a centralized exchange. Moreover, they are sub- ject to the rules a centralized ex- change imposes on them. In Centralised Exhange CEX (the tra- ditional cryptocurrency exchange such as Binance, Kraken or Coin- base), users send funds to the ex- change to manage them within an internal account. Though funds are stored on the exchange, they are kept outside of users’ custody and are vul- nerable to threats in case the security measures of the exchange fail. As a result, centralized exchanges have been the target of various security at- tacks. Both Decentralized and Centralized Finance aims to achieve the same goal. They aim to make crypto trad- ing popular and improve the trading volume. However, the way these two ecosystems carry out their objectives is different. CEFI promises security of funds and fair trade on those funds. Investors with conventional currency can also take part in crypto trading. Moreover, CEFI exchanges provide them with customer support services that DEFI services do not offer. On the other hand, DEFI intends to make the space intrusion free. It pro- vides a space for investors to imple- ment their strategies without having to deal with an intermediary entity. Both DEFI and CEFI deliver a wide range of cryptocurrency-related fi- nancial services. In terms of features and financial services they offer, there are many similarities between CEFI and DEFI. There are also signif- icant differences between them: • Regulation: One of the biggest dif- ferences between decentralized fi- nance and centralized finance is the fact that the system is regulated in case of CEFI whereas exactly the opposite is the case with DEFI. In centralized finance, the responsi- bility of safeguarding the money of the users is with the exchanges. On the other hand, the assumption be- hind DEFI is that the transactions would be successful as a result of smart contracts. In simple terms, ISSUE 161 MAY 2022 the BANKING EXECUTIVE 11