What the counterculture of DeFi means for financial institutions

As the adoption of financial services that live on blockchain protocols increases, what are the considerations for centralized institutions?

03 May 2022 5 min read
by Global Relay

Decentralized finance (DeFi) is growing exponentially and poses multiple threats to the monopoly financial institutions have long held. DeFi is not going away, and financial leaders need to understand that the revolution is cultural as well as technological. One of the driving forces behind DeFi is a new generation of digital natives who are pioneering cryptocurrency, championing non-fungible tokens (NFTs) and other DeFi services–and understanding the cultural underpinnings of these phenomena will be pivotal in how financial institutions step into the future.

What is DeFi?

DeFi is an umbrella term covering all the financial services people can access on public blockchains. The blockchain makes these services self-executing, so users conduct their business directly with another individual through an application. Exchanges are peer-to-peer rather than proceeding through a central system, allowing people to skip interactions with banks and other financial institutions altogether while conducting transactions all around the world.

Traditional financial institutions are constrained by geographical location and an immense burden of tangled regulations, while DeFi activity can take place at any time, in any location as long as an individual has an appropriate device with internet access. This technology is making critical services like basic banking more accessible to people on a global scale, and adoption is gaining momentum.

There’s tremendous potential for DeFi to completely upend traditional finance in the coming years as the technology becomes more user-friendly, so institutions need to stay vigilant and aware of what’s driving this rapid evolution if they want to remain competitive.

How DeFi is Driven by a Counterculture

The common view is that DeFi services and subsets like cryptocurrency are little more than perplexing new technologies, but the tech is only the tip of the iceberg. To develop a complete understanding of this fast-growing counterculture, we have to understand that the majority of adopters are millennials and Gen Z, two generations for whom navigating the digital world is second nature. These adopters are using DeFi to push back against the constraints of traditional financial institutions even in crucial long-term investments. A study of more than 1,000 people reveals that 56 percent of Gen Zers and 54 percent of millennials are including cryptocurrency in their retirement strategy, making DeFi impossible for institutions to ignore.

The world of DeFi is still highly unregulated and thus laden with risk. Those who choose to interact with it typically have an independent streak that the financial industry just isn’t used to. The DIY, peer-moderated nature of DeFi has led to the term “the Wild West of crypto”, and the rules are still being written.

Financial institutions must understand that DeFi adopters expect faster and more convenient services that centralized finance may not be able to compete with, despite the raft of risks that accompany the new technology. This counterculture, also laser-focused on transparency and personal privacy, is presenting traditional finance with unexpected challenges that demand rapid change.

Deciding to Adopt or Avoid

Whether institutions like the upheaval or not, there’s no denying that the DeFi revolution is already in full swing and entering the mainstream. Consumers are already using established services like PayPal and Venmo to purchase cryptocurrency. Amazon is using distributed ledger technology to automatically convert purchases to loans from third-party lenders in order to provide “buy now, pay later” options for customers. JP Morgan has even gone so far as opening a “lounge” in the blockchain-based world Decentraland, where digital “properties” are being sold for millions of dollars.

In fact, longtime cryptocurrency skeptic Jamie Dimon admits in his most recent letter to shareholders that “Decentralized finance and blockchain are real, new technologies” and that “JP Morgan Chase is at the forefront of this innovation” through its adoption of a blockchain network called Liink.

However, just because traditional institutions are making forays into DeFi and the metaverse doesn’t mean they are accurately gauging the needs of their customer base. In many cases, they are simply attempting to cash in on the hype rather than acknowledging the characteristics of the counterculture.

Financial institutions have a careful line to walk if they are going to take advantage of DeFi. They are hamstrung by regulation, while user-created platforms are not, resulting in a strong competitive disadvantage that’s a deterrent to entering the space. They must navigate a dizzying complexity of laws and technological implementations all while trying to appeal to a group of people who are inherently distrustful of institutions.

Considering the Communications Variable

Not only do financial institutions have to unravel the mystery of the growing DeFi counterculture, they have to do so without running afoul of communications archiving regulations. The privacy-obsessed members of the counterculture are more likely to use one or more of the many blockchain-based secure messaging platforms that make it impossible to trace communications.

Without an ironclad policy that addresses the growing number of communications platforms used to conduct transactions, financial institutions attempting to enter the DeFi space expose themselves to undue risk in the attempt to better understand the userbase.

Preparing for a Shift in Paradigm

There’s no doubt that financial institutions are looking for ways to capitalize on DeFi services, given how intertwined they will be in the metaverse that many are forecasting will reach trillions in worth. However, they must find a way to contend with the fact that the current industry model is in direct conflict with the counterculture of DeFi, especially when it comes to regulation. Fleshing out understanding of the culture fueling the architects and users of DeFi is the first step toward building out viable and valuable services for a decentralized future.

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Published 03 May 2022

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Global Relay

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