The whitepaper published by Bitcoin in 2009 and titled “Bitcoin: A Peer-to-Peer Electronic Cash System” signaled a significant shift in the way the financial system worked. Various supporters of cryptocurrencies have, for a significant amount of time, advocated for the use of cryptocurrencies and the many innovations that have emerged from the use of cryptocurrencies, such as decentralized finance (DeFi), as a substitute for the current monetary system.
However, it has been thirteen years since the shadowy figure known as Satoshi Nakamoto published the nine-page paper, and the cryptocurrency market is still undergoing a large number of iterations, both of which have raised questions about the market’s potential to replace traditional financial systems.
During the Technext Conference 2.0 #TNC2022, the CEO of the cryptocurrency financial platform Bundle, Emmanuel Babalola, said, “I envisage a future when banks would custody crypto.” According to his predictions, in the not-too-distant future, financial institutions will start delivering cryptocurrency services in the same way that they do traditional fiat currencies.
Babalola has said that he had believed that the blockchain technology and crypto-powered concept known as DeFi would render banks obsolete and make financial services available to anybody, wherever in the globe. However, he now feels that this idea is a hoax.
According to him, traditional financial institutions will eventually adapt in order to support cryptocurrencies, much as post offices did when email was first introduced.
In addition, he made it clear that Bitcoin was not a substitute but rather an option.
“It was effectively removing money from governments and establishing the money of the Internet, which anyone may choose to use as an alternative, without dependent on government-backed currencies,” said Satoshi Nakamoto, co-founder and CEO of Bitcoin.
Defending the use of decentralized finance as an alternative to traditional banking
Although Babalola is of the opinion that DeFi will not take the place of banks, many people disagree with him and argue that it may be an alternative.
However, what exactly is DeFi?
Investopedia describes decentralized finance (DeFi) as a “new financial technology” that is based on “secure distributed ledgers” very similar to those used by cryptocurrencies. This indicates that it is a system that is driven by blockchain and that it provides financial services like credit, transfers, and even insurance utilizing cryptocurrencies.
Imagine trying to create a bank account without providing your name, a photo of yourself, or any of your biometric information. To be qualified for services provided by DeFi, all you need is a cryptocurrency wallet.
According to an article published on CoinMarketCap, decentralized finance (DeFi) has the potential to replace conventional finance due to the fact that it provides greater levels of security, quicker transactions, and reduced costs.
The concern that conventional and central banks have over decentralized finance is another consideration that gives validity to the idea that it may one day replace banks and other traditional forms of money.
The majority of nations’ monetary authorities have reacted negatively to the proliferation of cryptocurrencies in one way or another. The attention of governments all around the globe was drawn to cryptocurrencies as their use grew increasingly widespread and they commanded total market values that ran into the billions of dollars.
In June 2022, the National Bank of Ethiopia (NBE) issued a regulation that made it unlawful to utilize cryptocurrencies as a method of exchange or trade inside the nation. This regulation took effect immediately.
The Central Bank of Nigeria (CBN) took a similar stance in February 2021, when it forbade commercial banks from enabling transactions linked to cryptocurrencies. As a result, the majority of cryptocurrency users were forced to engage in peer-to-peer transactions.
The situation is the same in other parts of the globe as well; in June of 2021, the United Kingdom demonstrated its mistrust of cryptocurrencies by banning Binance, the biggest cryptocurrency exchange in the world.
Janet Yellen, the Secretary of the United States Treasury, said that she was not a fan of Bitcoin in 2018, despite the fact that the United States has neither prohibited cryptocurrencies nor issued any regulatory orders against them. She believes that cryptocurrencies like bitcoin and Ethereum might be used to make illegal transactions easier.
If you can’t defeat them, you may as well join them.
It is interesting to note that some financial authorities have changed their minds about their position on cryptocurrency. The decision that Ethiopia made in June was reversed in September, when the government issued a directive to cryptocurrency firms, instructing them to register with the Information Network Security Administration, which is the country’s official cybersecurity agency (INSA).
Despite the fact that the CBN has not reversed its decision to prevent commercial banks from assisting cryptocurrency transactions, the CBN has recognized the significance of blockchain technology by introducing a central bank-issued digital currency known as the eNaira.
In the United States, Yellen conceded that cryptocurrency has advantages despite the fact that she was skeptical of it.
But does this suggest that existing banking institutions will be rendered obsolete by the crypto-powered DeFi?
The claim that decentralized finance is superior to traditional financial institutions in terms of safety, speed, and cost is up for debate.
Since 2012, there have been a total of 2,782 assaults against DeFi protocols, and the resulting financial damage is estimated to be $4.8 billion. These statistics are from the REKT Database.
However, conventional methods of managing one’s finances are not immune to being exploited either. In the worldwide banking business in 2021, there was a rise of 1318% in the number of ransomware assaults. In point of fact, frauds using fiat currency are 800 times more common than those involving cryptocurrencies.
Cryptocurrencies are only utilized by a small percentage of the world’s population. Fiat currency, on the other hand, is used by the vast majority of people both online and offline. This indicates that the majority of financial crimes will be conducted using cash.
Babalola believes that internet platforms, regardless of whether they deal in crypto or regular banking, would always be vulnerable to assaults. Users are the most important factor in the security of any online site.
But DeFi does have its benefits; the availability of financial services without any restriction other than a connection to the internet and education makes sense, but we see the necessity for regulation play out with every fall in the crypto market.
But despite the fact that central banks have the capacity to regulate the financial system, financial crises nevertheless occur. Therefore, might it be that the natural growth of conventional money is mirrored in the development of decentralized finance?