DeFi: The Future of Finance?
DeFi ‘versus’ CeFi
DeFi seeks to disintermediate the provision of financial services and aims to provide an alternative to centralised control by financial institutions.
A popular view among DeFi’s proponents is that disintermediation would increase the efficiency, transparency, innovation and inclusiveness of the financial sector – ie the assumption that financial services are better off without intermediaries. While there may be a simple logic to this, the reality is more complex. The highly-intermediated financial services industry has not developed by accident and intermediaries often play an important role in the smooth functioning of the sector.
An intermediary providing services to multiple end customers may be able to ‘net’ the transactions or exposures of its customers. This reduces the overall level of exposure in a market and serves an important risk-reduction function. It can also reduce the costs for end users in a way that may not always be possible for pure peer-to-peer transactions.
A central intermediary can operate as a ‘backstop’ when things go wrong in a particular market. Post-crisis regulatory development has focused on establishing default procedures for institutions and market infrastructure as a way to minimise the potential impact of any one significant institution going insolvent.
Access to financial services via human interactions (eg bank branches and ATMs) continues to be an important channel for many customers and institutions may be subject to rules that require them to provide access.
We think that DeFi looks set to enrich, rather than replace, the existing financial infrastructure and seems likely to provide more choice to consumers where an intermediated or centralised service is not the only option. While, in our view, the threat posed by DeFi is likely not existential, the ‘traditional’ CeFi industry cannot avoid pushing towards the same end goals of DeFi – increasing the quality of services, reducing costs to customers and increasing inclusion.
Dr. Alexander Glos Partner & Co-head Financial Institutions Group
Frankfurt am Main
Matthew O'Callaghan Partner
Brian Rance Partner
Brock Dahl Partner
Washington, DC, Silicon Valley
Kenneth Hui Counsel
Dr. Daniel Klingenbrunn Principal Associate
Frankfurt am Main