In the world of finance, blockchain is like that new kid on the block who is already running for class president – ambitious, disruptive, and surprisingly popular. It is spearheading a change in investment landscapes, much like how smartphones revolutionized communication. Technology, specifically DeFi or decentralized finance, has recently transformed the financial services and banking industries.
The exponential growth of the digital securities marketplace has attracted the world’s largest and most sophisticated brokers and institutional investors. It also gained the attention of a newer demographic of under-served retail and individual investors.
What is driving DeFi?
DeFi operates on decentralized blockchain networks like Ethereum. Meanwhile, TradFi relies on centralized financial institutions such as banks, brokers, and exchanges. One of the key advantages of DeFi is that it removes the need for intermediaries. This makes financial transactions faster, cheaper, and more accessible. Investors can leverage the digital marketplace to access their assets. Additionally, they benefit from the significant advantages offered by DeFi trading platforms.
DeFi provides greater transparency compared to TradFi. This transparency ensures that all parties involved can verify the transaction’s details and ensure it is executed as intended. With all transactions encrypted and recorded on a decentralized network, this end-to-end, transparent, secure process makes it virtually impossible for hackers to manipulate or steal user funds.
As a result, it is not surprising to see the exponential growth of the global DeFi market. The Total Value Locked (TVL) increased from a mere $601 million at the start of 2020 to $239 billion in 2022. TVL is a metric used to measure the total values of digital assets in different DeFi platforms.
The rise of DeFi has been driven by several factors. These include more sophisticated and powerful blockchain technology, the emergence of cryptocurrency as a globally recognized asset class, and tokenization.
Crypto assets have dominated much of the conversation around DeFi. However, the securities industry has been one of the biggest beneficiaries of blockchain-driven financial innovation.
It is an alternative to the costly, sluggish, and unsafe paper-based market. A digital security token for financial asset classes like equities, ETFs, and fixed-income funds offers significant advantages. It uses blockchain-based Distributed Ledger Technology (DLT) to record and verify investment contracts and ownership.
As a leader in this space, I have seen digital securities evolve, much like watching a child prodigy grow up. They keep surprising you – in good ways, mostly.
Tokenization and digital securities have been touted as the future of finance. Think of tokenization as turning your beloved vinyl collection into digital music files – the classics remain, but now they’re more accessible, and you can’t accidentally scratch them!
However, there’s still a lack of awareness and understanding of tokenization and digital securities, particularly among Mom-and-Pop investors, which could limit their adoption. Education and awareness campaigns must be developed to promote the benefits of tokenization and digital securities and encourage investor adoption. The benefits include:
However, there is still a lack of awareness and understanding of tokenization and digital securities, particularly among ‘mom-and-pop investors’, which could limit their adoption. Educating the public about digital security can feel like teaching your grandma to use a smartphone. It is a journey of patience and revelation, but once she’s video-calling you every week, it is all worth it.
The elimination of centralized institutions and the shift to transacting via smartphones in our pockets and computers in our homes make financial services accessible to a previously underserved population that had no access to traditional banking systems, credit cards, and other payment methods. This democratization is potentially as big a financial opportunity for developing countries and markets such as Africa and Latin America as the internet.
Tokenization and digital securities enable fractional ownership, making it easier for investors to diversify their portfolios and access previously illiquid assets and a wider range of securities like real estate and private placements. Such fractionalization directly affects investors who could not previously afford to invest in the bigger, highly expensive assets or asset classes.
Digital securities provide access to a 24/7 global market that enables round-the-clock trading. So investors and traders can trade anytime, anywhere — including weekends and holidays — provided they have internet access.
DeFi platforms can embed various layers of compliance-based rules into a token to ensure that point-of-sale transactions can only occur between parties meeting all the required rule sets. These rule sets include regulatory frameworks, country-by-country requirements, tax compliance, and other customizable rules. The rules are established as smart contracts in the token and enforced when point-of-sale requests are made.
“Smart contracts” can instantaneously check rules embedded in message protocols without referring to a centralized system or ledger. Imagine all the hundreds of pages spent on ensuring compliance, regulations, and agreements compressed into a bite-sized block shared across computers. It’s hassle-free, paperless, and removes the need for manual processes —meaning no wait times or long queues— as compliance is built directly into the code.
An endless number of smart contracts can be linked together to specify eligibility rules and enforce regulations. This makes it easier for digital security to adapt to the different regulatory controls in various financial jurisdictions.
Smart contracts also mean lower transaction costs. Investors can buy and sell directly with each other without the need for clearinghouses or third-party intermediaries, meaning lower transaction fees without compromising trust and reliability.
Tokenization allows investors to switch between various asset classes with much lower costs than they would have traditionally incurred. Traditionally, significant costs have been associated with moving value across the asset spectrum, such as between asset classes like currency, commodities, fixed income, and equity. Now, an investor could move value between the US dollar, bitcoin, and Apple stock with just the cost of transferring between tokens instead of between the traditional asset classes.
The time is now
“Improving efficiency, lowering costs, and mitigating risk are essential today and will remain so in the future,” according to a report on the World Economic Forum website. “Even as we keep a foot in the present and another in the future, the mission of market infrastructures will not change: Our role is to hold and protect any representation of an asset, digital or otherwise, provide certainty, and guarantee the safety and security of the global financial markets.”
DeFi is not about to completely replace TradFi, not in the short term, at least. However, adopting DeFi models in a regulated framework to modernize existing markets creates new, powerful products and opportunities. The time is now.
If the future of finance were a sci-fi movie, digital securities would be the star – propelling us into a world where your investments are just a click away, and your bank is as virtual as your morning Zoom workout.
So, are you ready to join the digital finance revolution? It’s like hopping onto a high-speed train – and this one doesn’t wait at the station for long.
About Amir Tabch
Amir Tabch is chairman and CEO, renowned for his visionary leadership in the realms of financial services and FinTech. His comprehensive expertise encompasses investment banking, wealth management, brokerage, and multi-asset class trading. His extensive knowledge of FinTech, blockchain, and InvestTech has established him as a pioneering figure in the industry.
As a board member in various FinTech companies, Tabch has played a pivotal role in driving forward innovative WealthTech and RegTech solutions. His career is marked by significant contributions to technological advancements in the financial sector, including developing sophisticated portfolio management systems, implementing automated trading systems, and creating advanced investment advisory services.
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