As the global financial industry continues to evolve, new technologies are always emerging to test the status quo. A perfect example of this is decentralized finance (DeFi), a financial technology based on secure distributed ledgers similar to those used by cryptocurrencies.
At the Blockchain for Europe Summit 2022 in Brussels, Belgium, DTCC’s Jennifer O’Rourke, Director of Innovation Strategy & Design, joined a panel to discuss how traditional finance (TradFi) and DeFi can not only mutually survive, but also converge to improve solutions for clients.
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There is a wide array of uses for DeFi. From using automatic solutions that evolve the way TradFi has interacted with financial instruments to deploying the capabilities of innovative DeFi solutions and applying them to TradFi products and processes.
O’Rourke explained: “At DTCC, we’re thoughtful about pulling out these capabilities to provide efficiencies to financial markets in a regulated manner. What is going to be disruptive is the way TradFi applies these novel concepts that sit in DeFi, giving us an opportunity to immediately bring benefits to clients without introducing additional risk exposure.”
Combining DeFi Efficiencies with TradFi Governance
Where is the space that DeFi solutions fit best? Focusing on use cases and processes in TradFi and applying DeFi capabilities. An example of this is governance. In TradFi, there are manual interventions to resolve breaks within transactions. However, O’Rourke asked if one, “could imagine a solution that requires no intervention, adjudication or resolution in the fully autonomous world of DeFi?” After this year of DeFi hacks, it is difficult to imagine this. The efficiencies that DeFi offers will result in enhanced time and cost savings, but the idea of substituting governance with an automated code-based solution is unwieldy at this point in time.
O’Rourke added that issues around privacy, more specifically, clarification around identity, are not only required because of regulatory mandates, but are also due to risk mitigation and operational efficiencies. Proponents of both TradFi and DeFi have noted the need to incorporate digital identity and privacy protection into DeFi. Solutions that involve DLT-enabled self-sovereign identity allow for selective disclosure of specific identity attributes. “We are beginning to see the DLT solution landscape evolve where new technology solutions can be applied to address challenges that still remain in other areas already applying and experimenting with novel technology—and it will be interesting to see the way these solutions come together.”
As DeFi matures, it presents opportunities to add new capabilities to TradFi—but regulatory clarity is needed to close this bridge. Progress in this space, from both technology providers and regulators, will result in an appropriate level of access to these new rails providing risk mitigation and consumer protections.
DTCC takes an optionality-first approach to best solve clients' needs by leveraging technology to offer new products and services while at the same time, ensuring clients can continue to access these and current ones as they do today. The firm’s diverse client base consists of firms that are fluent in DLT and excited to participate in these new solutions, as well as others not as familiar or resourced to access the technology to interact with these solutions at this point in time.
O’Rourke concluded, “We approach our solution design with optionality, whether entering solutions through traditional rails or through DeFi, we research, experiment, design and deploy solutions that can serve all our clients today and tomorrow.”