Crypto: the services that banks could offer thanks to decentralized finance

Although cryptocurrency prices have fallen sharply from their all-time highs in November 2021, decentralized finance (DeFi) applications continue to grow and attract users to blockchain technology. This rapidly expanding universe intends to do without intermediaries such as digital giants, but also banks, by connecting users directly to each other.

However, banking institutions may have a card to play and reintroduce a form of intermediation to offer innovative services from DeFi. “Decentralized finance is not ready in terms of ergonomics and this is where banks and their networks, their sites and their applications could make applications more accessible and easier to use,” notes Julien Maldonato, partner of the Deloitte firm and consultant in the financial sector and Web3.

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DeFi remains very little known to the general public. Aside from people from geek and financial circles, few venture there. Some apps, like Curve, still feature very crude and technical interfaces. Others show sites that are more attractive but which generally remain in English, in financial jargon. Banks could reach a wider audience, beyond the insiders, by playing a role of distributor of DeFi products to savers and ordinary investors.

“For them it would be a way to expand their range of products and to offer new ones that they could not build on their own,” explains Julien Maldonato.

Better returns than Livret A, or even life insurance

Banks can leverage DeFi in particular to offer more attractive returns to their customers. For example, they could democratize staking, this cryptocurrency transaction validation mechanism in place on the vast majority of blockchains, aside from Bitcoin, and soon used by Ethereum after a long-awaited update in mid-September, called “The Merge”.

Staking is about freezing part of your digital assets to participate in the validation of transactions while benefiting from a return in exchange. “A bank’s engineers could create a node on a robust, energy-efficient blockchain like Tezos, put their financial institution’s servers to work to help secure this network and allow customers to bet on it,” explains the consultant. by Deloitte.

Another possibility: agriculture, these liquidity pools that allow you to exchange one cryptocurrency for another. Decentralized exchange platforms, such as SushiSwap, Uniswap, or PancakeSwap, offer remuneration to those who provide liquidity. Again, banks could place cryptocurrencies for their customers on this type of platform, to offer them returns of up to 7%.

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Finally, there are cryptocurrency loan applications, such as Aave, Maker DAO or Compound. “These applications present a good risk management”, assures Julien Maldonato. The principle here is to offer a return to users who lend their cryptocurrency assets. In order to be able to obtain a loan in this or that cryptocurrency, borrowers deposit on their side other cryptocurrencies that they will not need for the duration of the loan, so that they serve as collateral (collateral). One way to avoid any non-refunds.

“Here we return to a form of Lombard credit”, explains Julien Maldonato. This type of loan was backed by investments given as collateral.

Cheaper international money transfers

To facilitate international transfers of funds, banks could also use stablecoins, these cryptocurrencies whose price is supported by traditional currencies, such as the euro or the dollar. “Today the fees are very high for sending money abroad, to the United States for example. It is necessary to manage the weight of compliance, linked to the various jurisdictions involved, which is expensive ”, underlines Julien Maldonato.

The stablecoins drastically reduce the number of intermediaries, because “everyone will attract directly from the blockchain”. Banks may use various stablecoins such as USDP (Pax Dollar), which is regulated in New York State, or EUROC (Euro Coin of Circle). Above all, they may decide to create their own stablecoin, as the payment giant Paypal is doing.

A bank-specific euro stablecoin could be a way to build customer loyalty. “It would allow us to offer an ecosystem with flexible operation. The rewards could be associated with stablecoin, which could be used for farming rather than “sleeping,” says the Deloitte expert.

Suggest another way to insure yourself

By taking a side step towards insurance products, banks could offer coverage of digital assets through a decentralized finance app like Nexus Mutual. Its operation consists in insuring the assets against the risk of loss (in case of piracy for example) thanks to a shared sum of money. The app uses the Ethereum blockchain “so people can share risk together without the need for an insurance company,” he explains on his website.

With this system everyone can insure these assets “but also become an insurer and collect premiums and benefits”, explains Julien Maldonato. If the application focuses on digital assets today, perhaps objects, such as a smartphone, will also be insured in this way tomorrow.

Position yourself in the economy of tomorrow

Finally, with the rise of digital, banks could develop digital wallets, which would be “a gateway to DeFi and a whole new world,” explains Julien Maldonato. This wallet could host the user’s digital identity and allow them to access their crypto assets, NFTs and virtual assets, but also metaverses and other services.

If banks don’t offer such wallets, other players will. The Ledger tricolor unicorn, specializing in ultra-secure physical wallets, is already very advanced in this area. “A bank may one day try to buy it before it becomes too big and expensive to acquire,” according to the Deloitte specialist.

More generally, DeFi players are advancing their pawns. The Aave Company, the company behind the cryptocurrency lending protocol, for example, recently won an e-money establishment license in Europe. He may soon be launching a bank card to better democratize DeFi.

Banks therefore have an interest in positioning themselves if they want to distribute DeFi-derived products and services and not face too much competition from this new decentralized finance. However, this market remains very young. They must therefore proceed with caution and fix the various existing applications, some that still appear shaky and too insecure.

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