DeFi products are gaining momentum. An example is credit where users lock digital assets into collateral pools where they can be borrowed. Compared to traditional lending, automated surveillance, settlement and escrow management reduces the rent taken to perform these actions. Led by the Compound, Aave, and Maker protocols, outstanding debt in DeFi loans (an important metric for tracking adoption) has exceeded $ 25 billion by May 2021 from $ 500 million in mid-2020.
Beyond lending, more complex derivative instruments are used, including options, futures and synthetic assets. In short, DeFi protocols are quickly creating a mirror image version of traditional capital markets, but they have significant advantages.
What does this mean for traditional capital markets?
Of course, DeFi- as it is currently in the crypto world - is not compatible from a regulatory standpoint due to its pseudo anonymity as well as its reliance on self-storage. However, this reality should not deter traditional finance officials and startups. There is already a clear roadmap on how innovations in the DeFi space can be adapted to traditional capital market infrastructure.
Big players in traditional capital markets have already noticed this change and are making moves. For example, they are aggressively stacking the digital asset custody game. For example, Standard Chartered's investment in Metaco, a Swiss-based digital asset custody solution provider, closed the $ 17 million Series A, which was twice as demanded.
Moreover, some forward-thinking jurisdictions have set up regulatory virtual spaces that encourage experimentation and innovation with DLT-based solutions for capital markets. Examples include the FinTech sandbox and Sandbox Express and the Singapore Monetary Authority, Europe's regulatory virtual spaces and innovation centers for FinTech, and the FinTech lab of the Saudi Arabian Capital Markets Authority and the ADGM RegLab in Abu Dhabi.
Apart from these virtual spaces, an increasing number of new entrants are taking the lead. Singapore-based regulated digitalized securities platform iSTOX graduated from MAS's FinTech Regulatory Sandbox. This made it one of the first DLT-based capital market platforms to be approved and licensed by a major regulator.
Opportunity
Naturally, with a complex and structurally critical system such as modern capital markets, changes will be incremental. Consider the example of depositors who are legally and practically embedded in the structure of capital markets.
1) As regulations need to change,
2) Development of DLT-based market infrastructure,
It will likely take ten years for custodians to be disrupted on a massive scale, as it must be tested and widely adopted.
This means that there are ample opportunities for both residents and new entrants to establish themselves in today's world of DLT-based capital markets. I think it's time for forward-thinking traditional financial players to make a move.
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