Customer trust plays a significant role in purchase decision-making, and companies know how important it is to build a trustworthy brand or concept that will attract and retain customers long term. In the case of emerging technologies such as cryptocurrencies and exchanges, the situation is no different.
“One of the main services traditional banks provide is emotional trust,” said R.A. Farrokhnia, a professor at Columbia Business School and executive director of the Columbia FinTech initiative. And despite the economic rents and fees charged, banks “ensure that if you want to borrow money or make a payment, the counterparty risk is lower because you have a central authority in place.”
Other companies like LendingClub that provide unsecured personal loans to consumers also act as intermediaries between lenders and borrowers, helping users to process transactions without having to step inside a bank or use a credit card.
In a scenario where those intermediaries are removed, you enter the realm of decentralized finance (DeFi) where “you need to rebuild some sort of trust mechanism in the system,” Farrokhnia said.
But opposite the trust deficit is the potential to reduce costs, provide more access to those who may not want to or can even participate in the traditional financial services ecosystem in both emerging and developing countries.
That said, Farrokhnia pointed out that DeFi is still in its infancy and not highly efficient, with many open questions ranging from “regulation to ease-of-use to access” that still need to be answered for the concept to get traction.
DeFi and Regulation
Farrokhnia contended that contrary to popular opinion, there is no “head-on collision” between regulation and DeFi, and regulation is important to ensure that the underlying products meet certain thresholds, standards and regulatory frameworks that have been set for classical financial products.
Regulation is also important to protect retail investors, he noted, because like any other system, there are still bad actors operating in the mix, and regulation will help minimize illicit activities in the domain. It will further encourage more adoption and less hesitancy among users, while increasing the possibility of wider adoption by the masses.
The road to regulation is not all smooth sailing, however. Farrokhnia said some innovative products like DeFi behave in ways that were not thought to be possible or might go against current regulatory regimes. It’s the reason why he said a lot of conversations are taking place between regulators and innovators as the former tries to keep up with the fast pace and figure out how best to regulate DeFi products.
Regional Differences in the Uptake of Emerging Technologies
One of the biggest issues determining how the emerging ecosystem will evolve is how restrictive or permissive regulations are and how they accelerate or slow down the different types of innovations currently taking place, Farrokhnia said.
He added that most tools, techniques and products are still within the hands of early adopters who are technically savvy people and know the ins and outs of the system. For it to reach the masses and a much larger audience, factors such as ease-of-access and user-friendly interfaces will have to be taken into consideration.
On differences in the uptake in different parts of the world, he said “there are certainly some interesting developments or ideas coming online in different parts of the world; they’re still not at the point in which you’re seeing major differentiation yet.”
Still, there are differences that exist from one location to another. For example, even though countries like China and Japan may be closely located, the payments systems in the two countries are quite dissimilar. And in the case of Europe where certain advanced countries like Germany were very cash-centric and had relatively lower adoption of credit cards before the pandemic, it was only after the onset of the crisis that more people, businesses and merchants began to shift online and started accepting cards.
He added that as Africa and Asia skipped the development of landline infrastructure and moved straight to mobile telecommunications, “it’s not outside the realm of possibility” that the evolution of cryptocurrency in emerging countries will take a similar leapfrogging path over traditional financial services.
He said this while reiterating the fact that adoptions, applications and innovation will play out differently in different parts of the world “depending on a multitude of parameters, including the existence of sophisticated financial services industry regulation, economic stability, exchange rate volatility, access to exchange rate and capital controls.”
Farrokhnia said blockchain technology could be one of those few seminal moments in the evolution of the financial services system since the invention of banking “that could revolutionize and provide a whole new paradigm on how humans interact with the world and financial systems.”
But eventually, how it and other emerging technologies evolve will depend on how questions around privacy and access, for example, are addressed.
The timeline of that evolution is impossible to predict, he said, “but I highly suspect that it would be one of the scenarios which would have been very hard to contemplate not long ago, and all of a sudden, you can do things you couldn’t do before, or would have been costly to do, and now you can do them more efficiently.”