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Unlocking TradFi with DeFi at Singapore Fintech Festival


Throughout the Singapore Fintech Festival, there was a big emphasis on decentralised finance (DeFi). Most speakers in attendance were extremely bullish on the potential of innovation in finance and digital assets, as were regulators and policymakers such as Lawrence Wong, the Deputy Prime Minister of Singapore. However, there was also widespread agreement that regulation must play a role in this development. There was a sense that DeFi must operate in close association with the traditional finance industry (TradFi) and adopt some of its practices.

This was discussed in more depth by an expert panel chaired by Alan Lim, Head of the Fintech Infrastructure Office at the Monetary Authority of Singapore. He brought together industry leaders Umar Farooq, CEO of Onyx by JP Morgan, Han Kwee Juan, Group Head of Strategy and Planning at DBS Bank, and Fernando Luis Vazquez Cao, CEO of SBI Digital Assets Holdings, to discuss how DeFi can “unlock” TradFi.

Farooq began the panel by emphasising that DeFi is “fundamentally, an opportunity for us to reassess how infrastructure works, end-to-end, and across all assets.” He said that the evolution of DeFi has led to the emergence of blockchain-based securities, commodities, and other financial instruments, all of which essentially represent “a future cash flow stream.” The opportunity, then, is “to standardise the actual data representation of these things” and operate them on the same technology. From an infrastructure perspective, DeFi could therefore help TradFi become much more flexible, fast, and liquid – and perhaps even encourage the emergence of new asset classes altogether as a result.

Juan picked up on many of the same ideas. He sees DeFi as digitalising TradFi: not a complete revolution in financial services as such, but rather an opportunity to make existing assets and trading practices better and more effective. Juan told the Singapore Fintech Festival that the opportunity from tokenised assets is “to represent [traditional] assets in a digital form”

“That allows the technology – blockchain and smart contracts – to be embedded and thereby allows you to benefit from the efficiency you see via the blockchain,” he added.

Of course, if and when traditional financial institutions begin to embrace crypto and DeFi solutions fully, regulation will need to adapt. Juan mentioned that regulators are increasingly beginning to look at the idea of “smart contract auditing.” This refers to a practice whereby smart contracts are programmed in such a way that ensures transactions and trades comply entirely with regulations. He also argued that there will need to be a solution to AML issues that arise from the fact that DeFi wallets are usually “anonymised.” Assuaging these concerns – and ensuring that bad-actors can be held accountable for illicit activity on the blockchain – will be key to “unlocking” TradFi with DeFi.

Interestingly, Cao suggested that the industry has been somewhat complacent in this regard so far. He said that they suffered from “an embarrassment of riches.” All at once, digital asset companies suddenly had the necessary licences to operate in Singapore, the US, Japan, and other major jurisdictions. They had the capital. The journey to mass adoption seemed seamless, even inevitable. But now it’s clear that the DeFi space will need to work harder in order to be accepted widely, both when it comes to retail investors and traditional financial institutions.

Cao argued that, despite its many potential benefits, DeFi is “a source of systemic risk” and therefore “a governance layer” needs to be added on top. He argued the key obstacle to integration with TradFi is establishing these crucial “risk controls” and putting them in place effectively. “We’re not quite there yet, but we’re willing to give it a try.”

According to these three panelists, the future of DeFi is in adding value to TradFi. The potential benefits are there for all to see: greater efficiency, greater speed, greater flexibility, and more innovation. But to get institutional acceptance, the DeFi industry will have to respond to a number of lingering concerns. Getting proper regulatory practices and governance standards in place will be critical if DeFi is to find a home in the world’s most important financial institutions.

Author: Harry Clynch

#DeFi #TradFi #Singapore #SFF2022

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