5 ways banks are adapting to decentralized finance

July 13, 2022 10:58 AM

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The rise of NFTs and cryptocurrencies has led to what has become widely known to industry insiders as decentralized finance, or DeFi. To keep pace with this growing trend, some banks are changing their ways to adapt.

Challenger banks such as Quontic Bank are joining the metaverse, while Current is working to provide hybrid finance to its customers. Read our roundup for more on these and other stories of how banks are addressing DeFi.

Decentralized finance takes center stage

The emergence of decentralized finance, fueled by NFTs and cryptocurrencies, has the potential to disrupt the current financial system, where money is issued by governments and managed by central banks.

In contrast, DeFi offers an alternative monetary system based on the mutual agreement of counterparties.

“What DeFi as a whole is, it’s trying to rebuild many of the parts of the financial system, but replacing centralized intermediaries with smart contracts,” said Aaron Lammer, a DeFi specialist at the proprietary trading firm Radkl.

As such, DeFi is an experiment in how money works on a scale not seen before. The banking world is watching.

Read more:

The revolution will not be centralized

Quontic makes digital land grab

Quontic Bank has jumped into the metaverse with the launch of Decentraland, a virtual world where participants can build structures and trade digital assets.

The majority of banks remain cautious, however. A recent KPMG survey of more than 700 banking professionals revealed that 70% were unsure about establishing a digital presence, while nearly 20% had no plans to enter the online world at all.

Quontic founder and CEO Steven Schnall sees things differently. “The metaverse is the new frontier,” he said. “We are probably many years from the point where people will go into the metaverse and transact business. To be on the front of that curve you have to plant a flag.”

Read more:

A journey into the metaverse with Quontic Bank

Terra's Promise of 20% Return Raises Sustainability Concern

Tiffany Hagler-Geard/Bloomberg

Why banks hold the key to a safe stablecoin market

Stablecoins provide a vital link between cryptocurrency and traditional finance, and are fundamental to the blockchain ecosystem. Indeed, acting Comptroller of the Currency Michael Hsu recently referred to stablecoins as the “oxygen of the crypto ecosystem.”

However, the collapse of TerraUSD in early May and other turmoil in the stablecoin market has highlighted that these digital assets are not as secure and stable as the name suggests.

With the industry seeking a safe way to meet the consumer demand for digital money, the President’s Working Group Report on Stablecoins has endorsed the idea that banks are best equipped to mitigate the risks of stablecoins.

Read more:

Banks can bring stability to the stablecoin market

“Hybrid finance” beckons for challenger bank Current

Stuart Sopp and Trevor Marshall had an instinctive sense of where their challenger bank would be heading when they co-founded Current in 2015: a new financial world combining blockchain-based services with conventional banking.

Seven years on, they are now working to provide “hybrid finance” to their customers, which integrates the advantages of decentralized finance with the comforts of traditional banking.

“Current is writing a new blueprint,” said Alex Johnson, director of fintech research at Cornerstone Advisors. “They are figuring out ways to pull in some of the benefits of defi, like higher yields on deposit accounts, but doing it in a safe, stable, easy-to-interact-with way for customers.”

Read more:

Challenger bank Current plans to pursue decentralized finance

Digital currency takeoff hampered by poor mobile app security

Central bank digital currencies are increasing in popularity, with countries such as Japan having already issued CBDCs and others like China with pilot programs in progress.

But while the national digital currency trend continues to grow, security is lagging. Both nonbanking financial apps and traditional banking apps are likely to be used on smartphones to manage CBDCs, so recent hacks of Bitmart, BXH exchange and Celsius resulting in losses of more than $320 million are cause for concern.

To counter the threat, the Financial Action Task Force has issued guidance encouraging countries to assess the risks associated with decentralized exchanges, stablecoins, NFTs and peer-to-peer platforms.

Read more:

CBDCs are the future of money, but bank apps are stuck in the past