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DeFi May Not Herald Independence Day From Traditional Banking

Independence Day weekend brings to mind freedom, of course.

And before too long, we may have independence from the banks, from the third parties, and from the financial system itself. Or maybe not.

The promise of decentralized finance (DeFi) is that the advent of cryptocurrencies, and perhaps more significantly, blockchain, will eliminate the reliance on the traditional players in financial services.

In a nutshell, third parties would not have a hand in transferring money (or, really, anything of value) for users. That would eliminate the banks, the counterparties, the currency brokers, pretty much … you name it.

Centralized finance, as has taken shape over centuries, focuses and enables the activities that have become the bedrock of how we conduct daily life — borrowing and lending, of course, but also the transactions that get us goods and services.

It’s been a hallmark that banks and other firms are where we establish accounts, send orders, and generally give authorization to act on our behalf.  Orders — to draw on a checking account, to make a trade, to buy a bond — came and still come through central powers (banks or central banks) and exchanges.

The Glue That Binds

The absence of the central authority, via DeFi, leaves only the app, the blockchain and the direct interaction between the buyer and the seller, or the sender and recipient.

The key glue that binds the parties in a transaction is trust. In the case of centralized finance, we trust the system, or the intermediary (like an exchange). In DeFi, it is the technology, most visibly the immutable transaction ledgers, that garner the trust.

But the wholesale abandonment of the centralized financial model will be slow in coming, if it comes at all.

In a recent interview with Karen Webster, Jeremy Allaire, CEO of Circle, said that to scale and mature, DeFi will go through an evolution. The regulators will make sure of it.

“The role of intermediaries [going forward] will be key,” he said. “In particular, as [decentralized protocols over blockchain rails] becomes more mature as an infrastructure for financial market activity and payments activity, the regulators will want firms that are intermediaries to cover consumer protection and monitoring for financial crimes.”

Still Room For Intermediaries

Thus, the intermediaries will continue to be present, and will help cement the trust. It’s interesting to note that some of the most visible players in the crypto/DeFi arena are the intermediaries. That’s crystallized in the exchanges such as Coinbase, and other firms where digital wallets connect.

The gathering spots where buyers and sellers come to convert cryptos into one another, or even bring fiat into digital (crypto) options, still need a third party. Fiat still needs that transformation, especially as companies like PayPal seek to further consumer embrace of bitcoin and other crypto payments.

It’s interesting to note that any number of countries are curtailing the use of bitcoin (and its brethren) in anything other than speculation, if at all. China is the most visible country cracking down on cryptos, with bans on bitcoin’s use in financial activities (or being serviced by banks and others), and of course the weeding out of the miners continues. Elsewhere, Turkey recently banned the use of cryptocurrency and associated assets as a payment method.

Last month, Bank of England FinTech Director Tom Mutton said that a central bank digital currency (CBDC) could be “tens of thousands of times more efficient per transaction” than bitcoin. He noted at a conference this past week that “bitcoin, given its performance shortcomings and energy inefficiency, is in no way a relevant comparison for the sort of technology we might use in a central bank digital currency.”

And as reported by, Dan Berkovitz, commissioner of the Commodity Futures Trading Commission, said that DeFi acts as “shadow financial market,” stating that unlicensed trading of derivatives would be considered illegal and are a “bad idea … there is no intermediary to monitor markets for fraud and manipulation, prevent money laundering, safeguard deposited funds, ensure counterparty performance, or make customers whole when processes fail.”

At the same time, the guardrails being put around cryptos and various exchanges leave room for the development of CBDCs, which of course would tie into the extant central banking system.

As much as independence from “CeFi” has been touted by some bitcoin enthusiasts who envision banks and other intermediaries receding into the past, these hopes may prove to be more fizzle than fireworks.

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