DeFi : Implications for Small and Medium Enterprises
Cryptocurrencies are now being widely recognised as payment methods. This new financial infrastructure is being built on top of the blockchain technology that underpins bitcoin and the existing financial infrastructure that supports it. This is all taking place at the same time.
Bigger transaction banks now regard DeFi as a potential growth driver and disruptive force. It is used by companies and financial organisations to handle their daily operations and transactions. These services, which focus on managing a company’s liquidity, cash flows, trade and supply chain finance, and other instruments necessary to undertake domestic and international commercial transactions, are frequently only available to the bank’s most valued customers. Transaction banking revenue is expected to top $1 trillion by the year 2020.
Almost all of the world’s top commercial banks have at least experimented with blockchain for transaction banking services, which are still slow and inefficient, but none of these tests have included DeFi. Instead, they concentrate on streamlining bank operations and replacing outmoded financial instruments with standardised digital assets. In other words, transactions are still facilitated by traditional banks or more established fintechs. It’s not possible to disseminate risk throughout the whole system when evaluating a company’s credit risk based just on their financial statements. Client support infrastructure is likewise massive, which means that consumers cannot be serviced without incurring a big cost. These methods hurt bigger organisations, but they ignore small and medium-sized businesses.
Central banks are looking at whether CBDC could assist them accomplish their public good goals, such as preserving price stability and guaranteeing secure and robust payment infrastructure and facilities.
If effective, CBDCs might ensure that the general public retains accessibility towards safe money with robust backend infrastructure — while economies transition to digital. This might enhance payment alternatives, make cross-border payments quickly and inexpensively, boost financial inclusion, and even alleviate fiscal transfers during economic downturns.
More than just extensions of existing banking systems, DeFi platforms provide an alternative solution. It’s easier to expand transaction onboarding and market-based risk assessments since vital information isn’t dependent on central processing or a prior connection. Prior to DeFi, corporations had to do anti-money laundering and “know your customer” checks on each source of capital, as well as persuade their counterparts to join in the same transaction banking programmes. Additional evidence of debt or payables performance would be impossible for them to produce without financial statements.
Commercial financial services no longer face these challenges thanks to DeFi’s secure data transport between systems. Since crypto-assets are so volatile and there is so much regulatory uncertainty, most companies haven’t looked at DeFi as a viable alternative to their bank’s services until now. For instance, instead of meeting transaction banking regulations, Tesla paid $1.5 billion for bitcoins because of the asset’s intrinsic value.
To close these gaps, recent DeFi developments have made great progress. USDC and Binance, two stablecoins linked to the US dollar, are becoming more widely available. It’s easy to switch from one USD-backed stablecoin to another using services like Curve and trustworthy cryptocurrency exchanges. Interoperability methods like the Inter-Blockchain Communication Protocol have come up for both public and private blockchains.
Large organisations and financial institutions may be able to save a lot of money, while small businesses may see an increase in liquidity as a consequence of these new options for conducting business. Everything from short-term liquidity and fiat management to trade financing and payments to escrow services and asset custody are included in this broad category of transaction banking.
In contrast to giant corporations, small and medium-sized businesses (SMEs) require money to continue operating and surviving. SMEs have a $5 trillion funding deficit, according to a 2020 study conducted by the WTO, the ICC, and Trade Finance Global. Traditional business service frameworks aren’t a good fit for banks and fintech platforms, who have been looking for an answer. Despite the pro mise of AI and wide digitization platforms, the rapid rise of DeFi has accelerated blockchain’s importance in alleviating efforts.
DeFi is a catchall word for a blockchain-based financial system that enables peer-to-peer lending, high-yield investing, digital asset trading, and many other services. DeFi is unusual and though the blockchain software allows smart contracts, or micro computer programmes, to rapidly execute DeFi agreements without the need for credit checks, loan officials, etc. DeFi promises quick loan approvals, cheap costs, and quick money transfers.
It’s worth mentioning that traditional banks, credit cards, and banking institutions are all susceptible to theft, hacking, and fraud, and DeFi is no exception. DeFi, on the other hand, has the power to ensure small businesses going forward on their own terms as big banks continues to fade away.