The Mavericks, Ideaters and Innovators have infused many great ideas into financial markets for centuries. These ideas have seen the prosperity and decline of mankind, and the denial of associated non-economic morals. Yet, a common aspect of these centuries was the increasing concentration of financial market power.
During the global financial crisis a while back, we saw the traditional financial system failing. Not only did these systems fail, they robbed consumers, lost credibility, and thereby pressured regulators to awaken to the reality of broken systems. To protect existing consumers and maintain financial stability, the government needed to rescue the very agency that caused the crisis in the first half.
This started a series of serious new ideas to rethink the financial structure and systems. The concept of decentralized finance then began to move forward with revenge. When investing in a traditional financial system that is currently regulated, we are obligated and under the control of intermediaries (especially banks). Have these traditional systems been settled to improve inclusive finance or consumer interests? No, it’s an understatement.
* Old finance, not comprehensive
Despite all the tall claims, we have failed our brothers around the world. More than 1.75 billion people have not yet been deposited in banks. In an interconnected world, they don’t have access to reasonably priced credits or invest pouch-sized weekly or biweekly savings. Importantly, despite the growth of the Internet, many of them face digital exclusion and are therefore not mainstream of socio-economic participation.
Sadly, many of these consumers are forced to rely on informal or high-value payday loans to overcome cash flow problems. Even if these consumers are deposited in banks, traditional banks may not be interested in dealing with such small ticket size consumers. Or you may not get enough income from consumers in such a trivial category.
In addition, existing financial systems are set up in poorly interconnected or expensive ecosystems. Switching costs prohibit financial independence in choosing the right products and services for consumers. In most parts of the world, the simple task of moving money from one financial institution to another seems complex and time-consuming. Wire transfers between markets in different countries can take several days.
Have you ever thought about or asked questions about financial institutions? Why does it take a couple of days for a stock market transaction to complete when most stock markets are digital? Why are credit card access charges still high for vendors and merchants? Why are banks still struggling and unwilling to serve small entrepreneurs and businesses? Why is it difficult to understand the operational silos that still exist in these entities? Why are regulators still concerned about achieving FinTech growth at a faster pace? Why do regulatory agencies appear to be supporting traditional systems? However, regulatory agencies may not be fully exerting their capabilities and financial impact on society. Questions like this are abundant and point to a critical finger on what else can be done to improve the quality of what funding can actually offer.
* Web3.0 and why
Web 3.0 is still evolving, as is the innovation of its underlying decentralized finance (DeFi) such as blockchain and distributed ledger. Web3 is based on the core idea of decentralizing the overall nature of the Internet today and empowering all content creators equally.
Cryptocurrencies, which are not so popular in many governments, are commercially prominent applications of various web3 ideas. The spread of blockchain technology is slowly expanding. Web1 had little space for user interaction. It was essentially readable and slowed down access. Today’s Web 2 has spawned social media where users generate content.
* DeFi (decentralized finance) is not rebellious
The basic premise of DeFi is to use peer-to-peer interactions and move away from the cost of physical presence or access. This basic promise will influence and change the business model of financial institutions. Decentralized finance consists of financial applications built on blockchain technology, typically using smart contracts. Smart contracts are automated, enforceable contracts that do not require an existing intermediary to carry out agreed transactions. You just need an internet connection.
Most DeFi applications today are built using the Ethereum network. Innovations in this area have new networks that can provide faster access, lower cost scalability, and enhanced security. DeFi innovators are also beginning to address their concerns about high energy usage and become more environmentally friendly.
The existing financial system has intermediaries and associated inefficiencies. These are painful and costly to consumers. However, DeFi uses shared infrastructure and interfaces to solve these and achieve efficient interoperability. DeFi’s public nature provides security and trust. This is what the current institutions have failed over the years.
* Concerns continue
Governments and regulators continue to be concerned about social governance and fear of “loss of control.” These include the following questions:
• Will any of web3 weaken government control over the regulation of financial institutions?
• Will decentralization make it difficult for governments to regulate the Internet?
• Does any of these technologies pose a national security challenge or cause system problems?
• Will it further complicate consumer protection and cyber risk issues?
• Is there any technology that can be used to weaponize the nation?
The usual industry lobbying of traditional old people in centralized finance will continue. You may also be afraid that the network could be a short-term illness of technology that enables decentralization.
Still, pragmatic governments and aggressive regulators do not pick up food, even if it may appear to be an antithesis of establishment. Rather, they can use the mantle to create a stronger and more resilient financing mechanism for everyone. They are exploring the possibility of creating financial democracy, where financial inclusion is more likely. We also see a rapidly evolving global economy as fintech companies embrace cashless and virtual payment technologies on a large scale. In India, the government itself was the biggest supporter of cashless and digitalization.
According to various estimates, Web 3.0 could contribute about $ 1 trillion to India’s GDP by 2031. With more than 845 million Internet and 518 million social media users in 2021, India is the second largest Internet user in the world. By 2040, the total number of Internet users in India is expected to exceed 1.53 billion, but overall demographics are maintained and the median age is 35 years old and productive. With proper regulatory outlook and continued support for the innovative use of technology in finance, India can pave the way for financial inclusion and impact.
The benefits of DeFi need to serve all stakeholders and all types of consumers. Otherwise, only economically strong sections can afford or have access to it. The DeFi community needs to resolve concerns about trying to defeat the system rather than improving it. Other regulatory agencies and governments will not ceded. Neither a bit nor a byte!