The Banking Executive Magazine - May 2022 Issue

Will DEFI Take Over Banks? investors, and the financial markets. While the potential for profits attracts attention, there is also confusion, re- garding important aspects of this emerging market. DEFI regulation should address vari- ous issues including: • Transparency: Although transac- tions often are recorded on a pub- lic blockchain, in important ways, DEFI investing is not transparent • Pseudonymity: A second founda- tional challenge for DEFI is that these markets are vulnerable to dif- ficult to detect manipulation. DEFI transactions occur on a blockchain, and each transaction is recorded, immutable, and avail- able for all to see. But that visibil- ity extends only down to a certain identifier. Because of pseudo- nymity, the blockchain displays the blockchain address that sent or re- ceived assets, but not the identity of the person who controls it. • Identity: Without an efficient method for determining the actual identity of traders, or owners of smart contracts, it is very difficult to know if asset prices and trading volumes reflect organic interest or are the product of manipulative trading. DEFI GLOBAL MARKET AND IMPACT Decentralised Finance (DEFI) has ex- perienced tremendous growth since mind-2020. While it is still in its early days, DEFI has shown that de- centralising financial services at scale is possible. One of the biggest idea of using blockchain technology to reinvent the finance space lies in how the market can become permissionless and open to anyone. A further attrac- tion is the concept of composability, which means anyone can mix and match any existing DEFI offering to build a new one. The composability of such a network, effectively made of blocks of interlocking compo- nents, also means that newer innova- tions and needs in the finance space can be easily built on top of the net- work and plugged together, with everything being governed by smart contracts. Industry experts and media outlets have begun to report that DEFI may “kill banks” or at least reshape the fi- nancial industry as we know it. Almost $90 billion has already been deposited into Ethereum-based DEFI protocols. Some outlets are also re- porting that DEFI’s growth on the Ethereum blockchain is up 780% in 2021 according to a study by JP Mor- gan. FUTURE OF DEFI IN THE ARAB WORLD Arab banks, government and regula- tion authorities should build capaci- ties to understand the complexity of DEFI and leverage the opportunities while supporting innovation in areas related to distributed technology and finance. There is a quantum leap in the new possibilities of the functionalities of money through the innovation of dis- tributed technologies. This is shaping the global financial system. The DEFI space is gradually catching up with the traditional financial sys- tem and despite some of the obsta- cles which are certain while operating on the bleeding edge of in- novation, the world of decentralized finance is on the path to prosperity. Over time, it is difficult to predict how this space will shape when the power to build financial services will democratize. In recent years, an array of macro and technological trends are con- tributing to the exponential growth of DEFI. Whether in the form of decen- tralised exchanges, lending and bor- rowing of different asset types or through insurance products, DEFI is evolving and expanding swiftly to mirror the traditional financial serv- ices ecosystem. This new form of de- centralised financial technology may eventually have an impact on the fu- ture of centralised finance entities in the Arab world, with DEFI potentially being seen as an alternative that is cheaper, quicker and more relevant. REFERENCES Euronews, blog.liquid, analyticsin- sight.net, leewayhertz, .coindesk, seekingalpha, techcrunch,, netguru, hedera; PwC Switzerland, pymnts.com/blockchain, CNBC, techcrunch, United States Securities and Exchange Commission, Wikipedia, Investopedia. the BANKING EXECUTIVE 14 ISSUE 161 MAY 2022