While serious institutional interest in crypto may become an established trend rather than an emerging narrative, the focus of big money players is usually on Bitcoin (BTC). However, assets like Ether (ETH) and Decentralized Finance (DeFi) are starting to attract the attention of big investors.
For Siam Commercial Bank (SCB), DeFi is a key focus of their current digital assets initiative as Thailand’s oldest bank prepares for the anticipated financial-tech shift in decentralized finance. While other banks are still undecided or just making temporary forays into how to interact with digital assets, the SCB is keen to provide funding to explore the blockchain and DeFi space.
The SCB’s DeFi focus also comes at a time when regulators in Thailand are targeting the decentralized financial space for stricter regulations. Indeed, regulators are increasingly turning their attention to the niche market as national and intergovernmental authorities seek to provide legal guidance for the DeFi market.
DeFi initially kept the promise of decentralization; the disintermediation of the established gatekeepers of global finance. However, as banks and financial institutions invest in decentralized technology, the narrative seems to be shifting towards a hybrid form of DeFi known as Regulated DeFi, which combines the existing norms and efficiency of traditional finance, instant billing, and cost-cutting benefits associated with decentralized protocols .
Siam Commercial Bank’s $ 110 million blockchain war chest began as a $ 50 million seed fund initiated back in February by SCB 10X, the bank’s venture arm. As Cointelegraph reported at the time, the fund further strengthened the bank’s forward-looking approach to emerging developments in digital finance.
Speaking to Cointelegraph, Mukaya “Tai” Panich, chief venture and investment officer at SCB 10X, said DeFi was something of a revelation for the bank in its assessment of the emerging digital financial landscape.
“We worked on the blockchain industry and started looking at DeFi. And we were amazed, ”Panich told Cointelegraph. According to the SCB 10X manager, the bank was quick to recognize the paradigm shift in potential DeFi technology and the possible disintermediation of traditional financial institutions.
“DeFi projects can be fully automated,” he said, noting that human involvement would be limited to smart contract code upgrades. Panich also addressed the revolutionary nature of smart contracts and how lines of code can enable direct transactions between businesses such as lenders and borrowers without the need for a central counterparty.
Given the possibility that DeFi will turn the previous financial status quo on its head, Panich says banks should prepare well for the impending disruption:
“The reason we invest in DeFi and want to be part of the DeFi Protocol ecosystem is because we want to understand and use DeFi as it has the potential to make a meaningful impact on the financial industry.”
At $ 110 million, the Blockchain and DeFi fund makes up nearly half of the SCB 10X’s $ 220 million venture capital fund. Commenting on the size of the digital asset allocation, Panich said it reflected the bank’s commitment to the DeFi space, adding:
“SCB 10X has invested and built multiple collaborative relationships with the blockchain community in Asia and around the world, including Ripple, BlockFi, Sygnum, Alpha Finance Lab, Anchorage, Anchor Protocol (part of the Terra chain), Axelar and Ape Board, among other things. ”
Related: Venture arm of the Thai bank invests in the institutional crypto custodian Anchorage
Turn global finances upside down
As early as April, John Whelan, head of the blockchain laboratory at Banco Santander in Madrid, argued in favor of regulated DeFi. According to Whelan, private Layer 2 settlement networks for asset classes that run on public blockchains are likely to emerge in the future.
According to Whelan, introducing blockchain to reduce transaction processing throughput is a key focus for legacy finance stakeholders. Whelan’s comments highlighted the emerging narrative that instead of disintermediation, financial institutions will find means to incorporate DeFi technology into their own backend processes.
Panich made a similar statement, telling Cointelegraph, “I want to point out that I really do see a future where traditional finance companies will partner with DeFi companies. In my opinion, there will be an integration of traditional finance with DeFi in the future. “
According to the Chief Investment Officer of SCB 10X, banks and financial institutions have the necessary “customer-centric” experience to better offer innovative fintech services to consumers. “Going forward, I see a world where DeFi can power the back-end of traditional finance companies,” added Panich.
For Rachid Ajaja, CEO and co-founder of the decentralized capital markets company AllianceBlock, the promised cancellation of the old financing by DeFi is something that will happen in the long term. However, Ajaja said the short-term trend will be for more financial institutions to take advantage of aspects of decentralized finance.
The CEO of AllianceBlock drew parallels to the era of digital transformation, when fintech companies emerged to provide services through APIs connected to the banking system. “With the bridging of DeFi and financial institutions, we will see exactly the same thing, and little by little legacy systems will change,” Ajaja told Cointelegraph, adding:
“In the long term, I am absolutely confident that DeFi will completely turn the global financial system upside down, as everything that is done in traditional finance can be replicated in DeFi with lower costs, fewer middlemen, new opportunities and increased new revenue streams. It’s only a matter of time.”
Craig Russo, Director of Innovation at the non-fungible token vault and marketplace protocol PolyientX, also provided further insights into the possible future path for the adoption of DeFi in global finance. Russo told Cointelegraph that financial institutions will most likely adopt open access protocols through initiatives like Compound Treasury while using DeFi technology in their internal systems.
“A major goal of the DeFi movement is to overhaul the current economic system to better align incentive structures, which could ultimately run counter to the interests of some institutions and at the same time open the door to a new wave of fintech innovation,” added Russo .
Related: Thailand is targeting DeFi in the latest regulatory move
Dealing with regulatory pressure
As SCB continues its exploration of blockchain investment opportunities, authorities in Thailand are moving the regulatory limelight to DeFi. Back in June, the Thai Securities and Exchange Commission (SEC) announced plans to consider a licensing regime for the decentralized financial protocols, especially for projects that issue tokens.
Commenting on how the bank will deal with the increased scrutiny of the DeFi area, Panich stated, “The goal of SCB 10X is to be absolutely within the rules set by government and regulators such as the Thai SEC and the Bank of Thailand to work.”
“Blockchain and DeFi are very young, emerging and rapidly changing industries. As a TradFi player active in DeFi, it is up to us to work closely with the government and regulators to represent the DeFi industry’s perspective and to find optimal ways to advance the industry quickly. “
The Thai SEC’s plan to consider DeFi regulations is an indication that regulators around the world are currently paying attention to DeFi. Also in June, the World Economic Forum published a Policy Toolkit for fair and efficient DeFi regulations.
The emphasis on fair and efficient regulations is likely based on fears that blockchain startups could be penalized from a compliance perspective if stricter measures are applied against DeFi. Regulated entities such as banks and financial institutions may find it easier to negotiate these policy restrictions.
Indeed, AllianceBlock’s Ajaja made the same point to Cointelegraph: “DeFi primitives are definitely at a disadvantage compared to their mainstream financial counterparts in this regard.” So Ajaja explained that compliance gateways for protocols like Know Your Customer and Anti-Money Laundering for better compatibility with mainstream finance and the transition to real assets for DeFi primitives are required.