Do you know your DeFi from your TradeFi? We are here to help you...

We recently interviewed Charles Kerrigan , a Partner specialising in digital assests, fintech and crypto at international law firm CMS about the differences between #DeFi and #TradeFi as well as his thoughts on the future of both...

What is the difference between TradFi and DeFi?

The fundamental difference is the ability to transact without intermediaries, in other words the traditional financial services providers such as banks.?DeFi is at least as old as bitcoin because bitcoin was a method for sending value using only the internet.?That is the original decentralisation.?

Everything that follows is an extension of that logic.?The original bitcoin protocol was itself a combination of creation and collation, building on work that predated the internet but came into its own in the 90s once computers were connected and communicating.

Are TradFi and DeFi enemies or friends?

This is a cultural question.?

The biggest barrier to them being friends at the moment is the fact that they see the world in such different ways.?

Banks like the moat that costly regulation provides.?They say: “same business, same rules”.?That is quite right.?It begs some questions though.??DeFi developers want to innovate by setting up new business models, not just copy banks but with newer tech.?

Right now TradFi and DeFi aren’t competing.?But I think it is inevitable that they will, although not for the same customers in the same way.

?How can we reimagine FinTech Regulation to foster innovation?

Regulation is always the hard question.?

To think well about this question we need to take account of new things.?These include recognising that regulating DeFi is a subset of regulating the internet, as well as regulating banking.?

DeFi won’t sit alone; it is an automation technology so its siblings artificial intelligence and machine learning need to be considered alongside it.?That isn’t happening at the moment because you can’t (by and large) buy tokens funding AI development projects.?

If the DeFi builders are correct, their economies will create new sources of revenue from community, collaboration and users owning their own data and content.?If that is right there will be business models that TradFi has never financed.?If a large share of the online economy goes that way, DeFi has not displaced TradFi, it has jumped over it.

?How does DeFi create competition for regular banks?

The number of intermediaries even in simple transactions is so great that simply sharing a diagram of entities and tasks in a transaction makes the case for DeFi.?

Ultimately, what you are not trying to do is digitalise an existing analogue process.?The target is a fully digital process.?

DeFi delivers that but, currently, only on an experimental basis because we aren’t clear what token models are most appropriate or even how each of them work in all situations.?We know that they are needed to address issues like governance and incentives but we’re still at the start of understanding all the variations in practice and in different circumstances and under different stresses.

?How can banks and financial institutions work with DeFi in a regulated manner?

“Compliant DeFi” is a term often used for DeFi with AML checks.?That is a start.

What are the positives and negatives of DeFi?

?????????????We don’t know yet. :)

?Do you see DeFi becoming the banking of the future?

I originally expected DeFi to relate to traditional banking as a kind of sandbox where experimental projects could be tested and the best aspects used to make incremental improvements in banking.?

Now, I think there is some possibility that DeFi displaces a lot of banking.?

TechPassport is currently working on an industry report for DeFi - if you would like to be featured in this report please contact Ojas Sekhri by email HERE