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A decentralized future: what role will banks play?


Gonzalo Santoyo
Gonzalo Santoyo, Research and Development Manager at NDB

Over the last few years, the possibility of decentralizing economic value management through technologies such as blockchain has given rise to new emerging business models, which are gradually gaining followers, although they continue to face great challenges. BBVA New Digital Businesses unit (NDB) analyzes the effects that this new paradigm can have on the current financial sector, and makes projections to understand what role banks may play in a decentralized future.

From 2015 to date, more than 3,200 DApps, or decentralized applications, have been created in the world. These platforms use blockchain technology so that users can exchange services directly with another, without a central entity managing them. Some of the most widely used are Steemit, a social network that rewards participants in exchange for contribution to the platform; or Splinterlands, a card game in which users can participate in battles and exchange collectible monsters through smart contracts.

For those who have no idea of what we are talking about, this might sound very strange. “And it probably is. But it also gives us a clue of how important the world of decentralized applications is becoming,” explained Gonzalo Santoyo, Research and Development Manager at NDB. DApps are one of the “first visible launching points” of this type of emerging business model that, although for now they have a limited scope, have been developing constantly in recent years. “Some of these examples currently reach very specific audiences only, but they show us how these types of models can evolve and how, when applied in sectors such as finance, they can completely change the rules of the game as we know them today,” he added.

In fact, the pace of creation of DApps applied to finance has been growing steadily since 2017, according to the State of the DApps website. And today, the third most widely used, by number of users and transactions, is Aave, a platform that offers a market for crypto asset loans among users. “The inter-user loan service is a clear example of the new types of solutions that are being developed under the concept DeFi or ‘Decentralized Finance’,” the researcher explained.

Evolution of the creation of decentralized applications for the financial sector from 2015 to 2019. (Source: State of DApps)

What is DeFi?

The DeFi concept was first coined at the end of 2018 and has been used to describe a series of projects built on blockchain platforms that aim to create a more open, inclusive, transparent and secure financial system. The movement could be framed within the appearance of Web 3.0, or the third generation of the Internet, in which the use of decentralized protocols prevails to enable users to regain control of their data, as well as their potential monetization.

In this possible decentralized future, where users can exchange value with one other directly through smart contracts without the need for intermediaries, the role of banks would change completely. “This new environment would give rise to the emergence of unprecedented new scenarios for the financial world, where aspects such as identity, safekeeping, customer relations and advice would potentially undergo major transformations,” explained the manager at NDB.

The NDB unit has identified research methods and work areas where banks could play a relevant role in the future, among which three stand out:

  • Identity, Privacy and Data

As part of the emergence of Web 3.0, the need for systems that enable users to identify themselves securely and unequivocally on the Internet to access decentralized services is becoming increasingly important. In this context, banks could become a key player when it comes to helping customers not only verify their identity, but also manage the data generated around their online activity, and even help customers obtain value in exchange.

In addition, new services could also be created to manage the reputation of users in this new decentralized scenario. For example, banks could create new decentralized credit scoring systems without intermediaries. “The reputation of customers or companies could be managed directly through decentralized, traceable and unchanging databases, built on the real interactions of users coded in the network,” he explained.

  • “Tokenization” of Assets

The “tokenization” of the assets involves the creation of digital representations of real physical assets (such as real estate, valuables or even production machinery) in distributed databases. In a decentralized financial system, users could operate directly with these assets to exchange value between them. “And this not only refers to money; other physical goods can also be linked to programmable tokens that feed this new economy,” Santoyo explained.

In this regard, banks could be responsible for the creation and management of all types of programmable digital assets, as well as offering financial services that make it possible to operate with them in a decentralized market. “They could vary from a work of art to real estate or a factory; everything is likely to have a digital equivalent around which we can offer financial solutions, such as insurance, which are activated through the use of smart contracts,” he added.

  • Custody

In this decentralized scenario, users may also require services to protect their digital assets (or crypto assets) privately and securely; another area in which banks could play a leading role. Specifically, they could be responsible for creating solutions that enable the storing, exchanging and monitoring the evolution of these assets, “something that banks could do, just as they have done for centuries with conventional money,” Santoyo explained.

  • New Roles for Banks

In summary, “the research shows that banks such as BBVA could be well positioned to be the link between the different centralized and decentralized players in this new economy,” added Santoyo. For example, financial institutions may be responsible for interacting with regulatory entities and central banks to ensure the creation of security standards that regulate these new types of financial transactions, as well as ensuring stability and reducing the volatility of products such as stable cryptocurrencies, or “stablecoins”.

Another role that banks could play in this scenario would be that of access to new forms of investment for large companies. Until now, investment in decentralized ecosystems has been predominantly used by individuals; but with the new added element of institutional investors in this context, there could be a demand for new services, “such as asset management, custody or contact with markets,” which banks could offer, he explained.

“All these scenarios are still far from materializing, and numerous challenges, both technical and regulatory, remain to be met for their effective application. However, as we see with the evolution and growing importance of DApps, users are increasingly familiar with these types of services, and only companies that know how to understand and meet these needs will continue to be relevant in a decentralized world,” Santoyo concluded.


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