Whatever Happened To Cryptocurrency DeFi Is Real

In Jamie Dimon’s annual letter to JP Morgan Chase shareholders, he clearly stated:DeFi and blockchain are real”, which he previously said, “I don’t care about Bitcoin. I’m not interested in that.” However, while skeptical that cryptocurrencies will have an important role, 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.

DeFi without Bitcoin? Opinions are certainly divided, but when it comes to the ongoing entertaining debate between Marc Andressen and Jack Dorsey, I’m on Andressen’s side of the fence. It is not clear to me at all what Bitcoin is.
While it is the universal and utopian money of the future, I think that the ongoing experiments in the world of DeFi will pave the way for new ways of doing business in the financial sector over time.

I don’t see this as a controversial position. In fact, I think this has long been the opinion of serious players in the financial services mainstream. Irfan Ahmad (Vice President of State Street, the world’s largest custodian) recently noted that cryptocurrencies are not only entering a new winter, but also “polar vortexConsidering the collapse of the Celsius decentralized finance (DeFi) protocol and news that Three Arrows Capital has filed for bankruptcy, it seems like a reasonable view. However, under the ice, he and other investment banks are attempting to use joint account technologies to create new trillion-dollar markets that do not contain speculative cryptocurrencies, but instead use digital representations (i.e. tokens) linked to real-world, fixed assets.

There is no paradox: Regardless of whether cryptocurrencies survive the impending regulatory storm, central bank 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 be just tokenized and traded commodities without swaps and settlements. Banks will specify any type of collateral, such as property rights, using technology. As the Bank for International Settlements (BIS) states in its current Bulletin (no. 57, June 14, 2022), “DeFi lending must be involved in the large-scale tokenization of real-world assets if it is not to remain a self-referential system. backed by speculation.”

Tyrone Lobban (Head of Onyx Digital Assets at JPMorgan) speaking at Consensus 2022 last month described in detail He highlighted how much value awaits in the wings in the bank’s enterprise-grade DeFi plans and tokenized assets. He said that all of the tokenized assets, from US Treasuries to money market entertainment stocks, can be used as collateral in DeFi pools, bringing trillions of dollars of assets into DeFi, “so we can use these new mechanisms for trading, borrowing. [and] lending, but with the scale of corporate assets.”

True Innovation

This will be an entirely new financial services industry, and it will be an important one. As The Economist notes, because tokens can be digital representations of almost anything, they “can be efficient solutions to any financial problem.” Apart from anything else, tokens mean a lower cost trading environment, so major players will want to use them as soon as the regulatory environment is stable.

As Thomas Zschach, SWIFT’s Chief Innovation Officer, puts: “Today’s financial institutions often do not engage in unauthorized digital assets due to their unregulated status and anonymity… But many financial institutions, central banks, market infrastructure and others, including SWIFT, are experimenting with digital assets, particularly CBDCs and tokenized assets. ”

Why? Why? SWIFT says its goal is to unlock new opportunities to increase efficiency, reduce costs, encourage financial inclusion, and continue to bring more value to their communities. This is not a unique perspective. That’s why forward-thinking financial institutions are looking at this: Not because of ideology, but because of money.

Something that the emergence of enterprise DeFi will entail is KYC etc in legitimate markets. It is a digital identity infrastructure for necessity. This is already starting to happen here and there (for example in Aave
Arc) but if we are going to connect DeFi with the “real world” we need a scale identity infrastructure.

I was lucky to have Tyrone on my digital identity panel at Money20/20 in Amsterdam last month. He is a thoughtful man and I take his views very seriously. His view is that the way forward here is to use digital identity building blocks such as W3C verifiable credentials (VCs). I have to say that I completely agree with the view that VCs are key to scaling solutions, and “as verifiable credentials are not kept on the chain, you don’t have the same overhead as writing such information to the blockchain, paying gas fees etc.”

Actually. And it has another important benefit: Privacy.

to see clearly

Transparency is one of the main reasons we all want to see a renewed and reinvented financial sector. Check out the latest issues in the financial world, like the Wirecard collapse. Corporate accounts included entities that simply did not exist. Since supervisors, regulators, and the board have failed to prevent crime on a large scale here, it’s reasonable to ask whether the technology could do a better job. I think the answer is yes, and I think it’s part of the coherent vision of how tokenization can do this: If I claim to own a thousandth of the Mona Lisa, it’s easy for you to control the digital asset platform. To see that the coin representing one thousandth of the Mona Lisa is in my wallet. You do not have to rely on auditors or other intermediaries.

As evident from the current crypto cryogenic polar winter vortex, or whatever it is now called, DeFi has some key advantages. Arthur Hayes correct notes That DeFi protocols control some gigantic credit books with completely transparent credit standards, counterparty addresses and clearance levels. Observers can continually assess the health of these books. Depositors can process all information regarding the health of various protocols before committing their funds. And when the value of the collateral falls, it is automatically liquidated so that there are no bad debts.

However, transparency does not mean that everything should always be visible to everyone. The Wharton School published an article on “DeFi Beyond Hype” last year, which noted that there may be some tension between increased auditability and transparency of shared ledger records and stakeholder privacy. It’s one thing for me to be able to review your debt ledger to determine if you’re equivalent somewhere in a joint ledger, it’s another thing for me to know who your counterparties are.

It can’t work like that. Confidentiality is vital to business. For businesses, they do not only want to protect the privacy of their customers and suppliers, but also do not want to explain their strategy to their competitors. Anonymity does not work for markets, but full transparency does not work for participants. What is needed is not the anonymity of the permissionless blockchain but privacy in a well regulated environment and this is where verifiable credentials are served. With the right trust, it’s easy to present an identity document that says I’m a U.S. citizen, over 18, and (for example) have a brokerage account without telling the world who I am.

(If I do nothing, those who give this important attention will of course surrender my true identity to the force of law and order.)

Thus, we come to a nexus of DeFi, verifiable credentials, and privacy-enhancing governance structures, the potential site of a kind of Big Bang in the financial world: the creation of a new financial services universe.

So I agree with Richard Turrin on the subject. who wrote this There is an urgent need to “fix rampant corruption, fix DeFi protocols that encourage leverage, fix fraud, and fix the culture of greed.” and Lisa Wade who said “Once regulated, incorporating these new asset classes into the portfolio will be fundamental portfolio management knowledge.”

They are absolutely right in saying that DeFi will change financial services for the better.

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