DeFi becoming more popular with Australian businesses

Decentralised Finance (DeFi) is becoming more popular in Australian businesses with firms seeing growth potential in this Web3-based technology.

Joseph La Monte, senior director, crypto and Web3 at FIS told Digital Nation Australia that DeFi plays a much larger role than just enabling crypto.

“The draw of DeFi is that its core smart contract technology can be leveraged to build decentralised markets that are highly automated, faster and open 24/7,” he said.

According to the recent FIS Global Innovation report, a broad majority of Australian businesses say they expect a major or moderate impact from each of these trends in the next 12 months: embedded finance at 89 percent, ESG at 88 percent, cryptocurrencies at 86 percent, the metaverse at 84 percent and DeFi at 83 percent.

“In addition, DeFi composability enables decentralised applications to stack on each other, increasing capital efficiency as assets can be used within multiple applications at the same time with minimal friction," he said. 

"This property also means that as more players enter the space, network effects kick in and the possibility of creating novel financial products and solutions grows exponentially.”

La Monte said test cases are moving out of the lab and into the real world. Examples include the development of asset-backed tokens like stablecoins, settlement of FX transactions using DeFi protocols, and the issuance of digital bonds over a blockchain.

He said, “The Reserve Bank of Australia has also recently released its report on the future of stablecoins in the country and noted that ‘stablecoins have the potential to enhance the efficiency and functionality of a range of payment and other financial services’.

“While it is still early days, we are likely heading towards a future where a part of international payments, currency transfers and equity investment may be done in part or completely on a DeFi model.”

Current hurdles

Technological and regulatory barriers are some of the hurdles faced by firms looking to enter the Web3, La Monte said.

“Adopting blockchain technology requires a new mindset and approach to work, as well as development of new products which takes time, specialised talent, and appetite,” he explained.

The other aspect to consider, La Monte said is the regulatory work that would need to be done to bring these instruments to market.

“We believe that creating a consistent framework for crypto regulation is key to accelerating institutional adoption of digital assets and blockchain technology. Regulatory clarity will help ease scepticism and represent a significant next step in the development of a legitimate digital asset ecosystem.”

Importance of education

La Monte explained that education is important in this space, especially when the popular narrative focuses on the scams and fails to distinguish between individual cryptocurrencies and blockchain technology in general.

“The learning curve can seem daunting to many businesses, and in fact the entire industry is going to have to learn an entirely new glossary of terms for supporting this ecosystem,” he said.

Firms can begin their journey by investing in internal education to understand the commercial, technology and regulatory environment, La Monte said.

“Hiring talents who have experience in blockchain technology can help shorten the learning curve for firms and supplement their learning process. Firms can also lean on their trusted advisors, their technology partners, and other outside consultants.”

Future of crypto

While the crypto market remains quite volatile due to the overall macroeconomic environment, a general move away from risky assets driven by interest rate increases, and the industry-specific turmoil over the past few months, La Monte said there are still pockets in which growth and investment continue at a strong pace.

“This includes enterprise investment and adoption of Web3 technology for real-world assets such as stablecoins; tokenised funds and tokenised deposits; central bank digital currency (CBDC) advancements and pilots; and the overall VC funded support for the Web3 technology ecosystem,” he said.

“These initiatives are all driven by a long-term technology investment cycle and outlook, which most industry participants (and many non-industry participants) agree has not changed, though the path between today and tomorrow may be longer and more complex than anticipated.”

La Monte said leaders will see an important 2023 pivot on two other related topics that are important in the evolution of adoption of both the technology and the asset class.

“The first is increased regulatory clarity, not just for crypto and stablecoins, but increased awareness of how Web3 technology can replatform and support assets within the existing regulatory framework will accelerate certain use-cases and regional product build outs,” he said.

“The second is ecosystem-based collaborations: 2021 and 2022 have been years of countless announcements of bilateral partnerships, including a number of our own.”

But in order to really drive adoption in the more complicated world of institutional financial services, an ecosystem of multi-party collaborations is required.

“I’m hopeful we’ll start to see more announcements from collaborations that deliver end-to-end solutions for the market, instead of individual components,” he ended.