Traditional Finance and CeFi.

“History doesn’t repeat itself, but it often rhymes.” The importance of blockchain for users to become consumer-actors.

Rules of engagement of the Blockchain.

If finance were conceptualized as software, much of it would be written with obfuscated code, involving unnecessarily complex structures that increase opacity. The technologies underlying web3 are proving to be an exceptional means to achieve the goal of transparency, also allowing individuals to take ownership of their data. In this sense, one of the added values of blockchain lies in its ability to manage an open, shared, and distributed (Distributed Ledger Technologies) ledger of immutable data without the need for a central authority. Its added value goes beyond mere value transfer, and apart from choosing the right platform to replicate existing processes faster and at a lower cost (such as bond issuance), its true consecration will come with the creation of new businesses.

Case History, finance, and CeFi.

2022 was a horribilis year for CeFi (Centralized Finance) and exchanges, with several failures; many were quick to blame the blockchain.

Yet, it is precisely the most spectacular collapse (FTX) that reminds us of familiar notes in the history of finance:

Ponzi Scheme
Money laundering
Fraud
Customer deposits not recorded on the balance sheet
Lack of liquidity management system
No idea how much cash was available at any given time
High-profile collusion

MADOFF teaches! The problem thus lay in an intermediary that collects capital and manages it more or less well. William Miller (“Mr. 520%”) and his Franklin Syndicate orchestrated a fraud as early as 1899, which was uncovered thanks to a journalistic investigation. In an era of information overload, the media plays an even more crucial role in conveying the right narrative about who does what (blockchain technology is a means… amen omen).

DeFi as a possible answer.

DeFi (Decentralized Finance) embodies the modus operandi of blockchain: similar to CeFi, the goal is the democratization of access to financial services. Its added value lies in the possibility of conducting transactions without the need for an intermediary. Consistent with the ideology underlying technology, it is that the user, and no one else, holds the keys to their cryptographic wallet. In the 2020-2022 period, the total value of assets deposited through DeFi’s smart contract executions increased from $1 billion to $230 billion (source: DeFiLlama). Did you say Consumer-Actor? Perhaps this is not yet the answer, but it certainly helps raise excellent questions.

A.A.A.: Seeking regulations.

Even if MiCAr were in force, it would not have prevented the FTX bubble due to a lack of regulations on continuous transparency of deposited funds. This indicates how the reality of regulations naturally lags behind the speed of technological reality; the gap can be bridged through a PACT… people, actions, technology collaboration, which includes all the entities involved (EBA, ESMA, EU for the Old Continent). A more global initiative is being studied by the Financial Stability Board (FSB), in collaboration with global regulatory bodies, to create ad hoc regulations in various jurisdictions for decentralized finance.

Conclusions.

The “conditio sine qua non” for tools like DeFi to express their full disruptive potential is digital literacy. Attention to managing key custody, assuming the risk of each operation, finding the suitable application for a specific use case… History doesn’t repeat itself, but it often rhymes! Just as financial education has long been essential for informed decision-making, for us to speak of consumer-actors, they must master the technological means to improve the accessibility of their choices.

Aldo Rossi – Business Developer Corporate Finance