DeFi services set to explode in 2022, but risks remain: PwC Thailand
Decentralised finance (DeFi) has the potential to transform Thailand’s financial services industry, but it cannot yet substitute fully for traditional services offered by commercial banks, PwC Thailand says.
Vilaiporn Taweelappontong, PwC Thailand’s Consulting Lead Partner and Financial Services Leader, said DeFi is disrupting the landscape of financial services, creating new investment opportunities while attracting app development companies, financial institutions and commercial banks who are seeking to leverage its potential.
“This year in Thailand, we’ll see a significant uptake in DeFi as more and more users are attracted to these new, innovative services. Whether for transfers, payments, assets delivery or lending, these services are much more convenient and affordable to access,” Vilaiporn said.
Demand for commercial banks’ services will decrease
“If the use of DeFi continues to surge, it presents a real threat to the demand for commercial banking services in the future. This would certainly impact the world of financial investment. We’ve already seen many institutional investors diversifying their portfolios into cryptocurrency,” Vilaiporn said.
A recent report by PwC, ‘DeFi: Defining the future of finance’, highlights six services in the DeFi ecosystem that are set to disrupt traditional finance the most. These services include:
- Stablecoins: A type of cryptocurrency where the price is pegged to the value of reserve assets to reduce volatility.
- Decentralised exchanges: Exchanges that allow users to trade digital assets without intermediaries.
- Lending and borrowing: Blockchain technology allows users to carry out these key financial activities without intermediaries.
- Insurance: Users can purchase insurance (for certain risks such as smart contract failures and crypto deposit risks) without an insurance company acting as an intermediary.
- Derivatives (synthetic assets): A contract with value derived from an underlying asset, which allows users to trade assets through a blockchain network without having to hold the underlying assets.
- DeFi aggregators: An information hub for users to view prices and the optimal yield for their transactions. This makes the market more efficient in the DeFi ecosystem.
“The ease of access to financial services and minimal verification processes make DeFi an appealing option, especially for the unbanked sections of society and digital asset investors. The biggest demographic of individual users to embrace DeFi is the younger generation who have been raised on a digital diet and are quick to embrace new technologies,” Vilaiporn said.
DeFi not ready to replace role of traditional banks
DeFi uses blockchain technology to record and process transactions without the need for intermediaries such as financial institutions and banks.
DeFi has seen rapid growth and proponents believe the technology is the future of financial services. Still, Vilaiporn said, “DeFi won’t be a complete substitute for traditional banking services as there are inherent risks that still need to be addressed such as hacking or fraud, which could cause significant damage to investors and users.”
As for the banks themselves, they should invest in research and development with the goal of integrating DeFi into their ecosystem, such as acting as intermediaries or providing DeFi aggregator platforms. Alternatively, they could also become DeFi platform operators, which would allow their clients to leverage the full scope of new services, she added.
Moreover, banks can expand their services to the unbanked population through DeFi, which is estimated to be around 1.7bn of the global population. This presents huge commercial viability for banks, and could help millions of individuals to attain financial wellbeing.
“We’ve already seen positive movements from two commercial banks in Thailand who are keenly investing in and developing DeFi services. Meanwhile, new entrants, who are non-banks, have broadened the range of technological expertise in the market. These new players are issuing digital tokens to users and allowing lenders to use their platform for loans,” Vilaiporn said.
Risks and regulations
As the DeFi sector continues to develop rapidly, regulators across the world’s financial markets are clamouring to keep pace.
Thailand’s Security and Exchange Commission (SEC) is also conducting their own study to make guidelines for digital asset fund managers and consultants related to DeFi and digital assets, with the aim to protect consumers from manipulation and cyberattacks, Vilaiporn said.
Recently, the SEC has issued a set of regulations for which barred digital asset business operators from promoting the use of digital assets as payment. The regulation will take effect on 1 April 2022.
“DeFi is considered a new technology that’s still in its infancy. That means operators and users must be aware of the risks involved such as transparency and cyber security of the platform to prevent hacks and data breaches.
“Meanwhile, they should remain cautious about the volatility of digital assets as well as keep an eye on any updated rules governing this sector, which will impact the future of DeFi,” Vilaiporn said.
