By Juan Rio Salvador, LinkedIn |Rioxa Consulting

Most of us are not familiar enough or comfortable with Decentralized Finance (DeFi) quite yet. However, this may change soon after Robinhood and other trading platforms halted or limited retail investors from buying more shares of GameStop (GME), and also at a later stage AMC (AMC) and Blackberry (BBE), although investors could still sell their shares. The search for alternatives and the attention shift to blockchain, DeFi and cryptocurrency trading platforms. 

The influence of social media groups, Elon Musk and communities in financial services

Online social media groups with thousands of individual investors, or also referred as retail investors, demonstrated their buying power. They influenced the prices of stocks; GameStop, AMC and Blackberry and cryptocurrencies; Dogecoin and Ripple’s XRP, and to some extent commodities such as silver.

We have seen the levels of volatility and speculation created when there is a coordinated effort to pump up stocks, cryptocurrencies or even commodities. They grabbed the attention of trading commissions and regulators to control what they consider “pump and dump” schemes. This is when a certain asset is puffed up online/social media and then more and more people buy. The risk is that not all will benefit as there will be those who are in early to sell when the price goes high. However, there will be others that purchase near the top and may suffer losses.

There were reactions about the limitations imposed by exchanges and why they let investors with the only option of selling. Social media communities, some politicians, high profile celebrities and global leaders like Elon Musk, billionaire Mark Cuban, etc commented on this. 

Elon Musk is the founder, CEO, CTO and chief designer of SpaceX; CEO and product architect of Tesla, Inc.; founder of The Boring Company; co-founder of Neuralink and also OpenAI. 

He is now worth around $182.9 billion, which at the moment makes him the wealthiest person on the world, according to Forbes’ estimates. So, when he tweets or talks, he gets people’s attention.  After he changed his Twitter bio to “#bitcoin” the cryptocurrency price surged. This was when already DeFi exchanges were experiencing record amounts of trading volume on the Ethereum network as investors were looking for alternatives to traditional exchanges. 

Robinhood, following the controversy created, explained that it was not like they wanted to stop people from buying these stocks. This was due in part to the regular / traditional settlement trade period and the need to comply with financial requirements and clearinghouse deposits. Broker-dealers could no longer offer Buys on these stocks due to increased capital requirements set by the depository 

Decentralized Finance Services – (DeFi) exponential growth in interest and demand

The DeFi narrative answers some of the questions that have come up following the GameStop saga, and the look for alternatives on central financial intermediaries such as brokerages, exchanges, investment companies, banks, etc.  and a faster clearance and settlement. Smarter customers keep raising their expectations on traditional financial services

We have seen an increase in awareness, assets and expansion of DeFi. According to Coinmarketcap (https://coinmarketcap.com/defi/), on the 2nd of January 2021, the DeFi crypto market cap is $42.22B,a 12.02% increase over the previous day. This is now probably the most active trend in the blockchain ecosystem.

As I covered on my last article about blockchain and cryptocurrencies, banks have traditionally been early adopters of digitalization to verify, settle, and record transactions. However, it is only now when they are increasing the adoption of distributed ledger technology (DLT), blockchain is the main technology under this umbrella, to be more effective and increase speed. I discussed how blockchain and cryptocurrencies are making global payments more accessible to the unbanked and those looking for agility and instant money transfers.

It may be early days for DeFi to transform global finance. DeFi and the industry legacy systems are likely to exist in parallel for the next few?years, with a gradual adaptation of the technology.

Defi and the real time settlement challenge (T+0 settlement cycle)

Financial services customers are more educated, technology savvy and now have more urgent needs and concerns. These are easier to share than ever before trough communities and groups in online and social media platforms such as Reddit, Twitter, TikTok, etc. and new alternatives to the traditional social media giants such as FB, YouTube and Google. Even WhatsApp is seeing an increase of groups and users moving to Telegram and others messaging apps.

Vlad Tenev, CEO and Co-Founder of Robinhood, following last week’s discussions around digital settlement services said; ” … The existing two-day period to settle trades exposes investors and the industry to unnecessary risk and is ripe for change”.  He may not have been thinking about blockchain and DeFi but these events seem to be bullish for blockchain, cryptocurrency and the DeFi ecosystem.

You have to wait two days for most stock trades to settle: two trading / business days (T+2). For example, if you execute an order on Monday, it would typically settle on Wednesday. This is to allow for the exchange of cash and shares between the buyer and the seller. Clearinghouses establish financial requirements for members including deposit requirements designed to reduce risk to the clearinghouse. 

Tenev also said that “…To protect innovation, to steward our industry into the future, and most of all to meet customer demand. We want to join together to move forward to real-time settlement.”

Blockchain has changed how payments and trades are settled on finance-related platforms. Exploring the concept of a DeFi accelerated digital settlement, T+0 settlement cycle, could be the next step for traditional finance. 

The financial services rollercoaster ahead

We were all looking forward to some type of “new normal”. In particular, banks and financial services were hoping for a calmer 2021. The idea was to focus on improving the customer experience and confidence in such a challenging macroeconomic and increasingly regulated environment. Part of the agenda was also to help customers to recover from the pandemic, to focus on sustainable finance and diversity, equity and inclusion (DEI). 

There is also an expectation that we all, including banks and other industries need to do more to address global issues. We are all facing the macroeconomic challenges and the need for environmental, social, and governance (ESG), diversity, equity and inclusion (DEI).  

This level of expectation and disruption is also an opportunity to transform the financial services industry. However, to achieve this the industry needs to be resilient but more agile and efficient and to meet customer’s expectations and regulatory compliance. One way to do this is to use technology to reduce manual intervention and the reliance on employees to perform compliance, repetitive tasks and controls to mitigate risks.

Regulators like the European Securities Markets Authority (ESMA) are discussing the potential risks and benefits of blockchain under several scenarios and the EU rules. This is challenging because blockchain technology, as we see with DeFi is constantly evolving 

Author bio

Juan Rio Salvador is a global business transformation leader and risk management expert. He has over twenty years of real-world management experience in financial services and innovation in Europe and the USA.

He founded Rioxa Consulting to empower people to thrive in life and in business by inspiring them. Juan is passionate about leadership & business strategy, the future of work, continuous improvements, blockchain, and artificial intelligence (A.I.).

He is an energetic international speaker invited at forums and conferences in Frankfurt, Budapest, London, Madrid, Barcelona, etc. He recently published “How to Build a Thriving Busines, The Proven Formula for Growing Your Business Post Covid-19”.