How decentralised finance (DeFi) can be used for regulated financial activities

The evolution of decentralised finance (DeFi) – and the potential to apply it to institutional use cases where financial applications are built on blockchain technologies deploying smart contracts – is being met with great interest by industry spectators. Proponents see a strong case for the rise of a new financial paradigm, which is based on the principles of cooperation, composability, open-source code; and is underpinned by open, transparent networks. As a space that has moved into the spotlight, the road to utilise DeFi for regulated financial activities is now under construction.

The continuously evolving macroeconomic and global regulatory landscape has meant slow cautious progress thus far, with developments predominantly occurring in the retail space or via incubated sandbox style settings. However, there are emergent successful implementations and over the next one to three years, institutional DeFi is widely expected to take off, converging with greater digital asset and tokenisation adoption – financial institutions have been preparing for this eventuality for several years.

In this white paper, we reflect on the recent history of DeFi and seek to demystify some frequently used terms, before taking a closer look at several key driving forces in the DeFi domain. Finally, we will consider what lies in store for the institutional financial services community on that road to institutional DeFi.

Authors

Dan J Sleep, Senior Vice President, Digital Assets and Financial Markets APAC, Northern Trust

Boon-Hiong Chan, Industry Applied Innovation Lead, Head of Securities & Technology Advocacy APAC, Deutsche Bank