The new frontier of financial banking
Meredith Wheelhouse and Emad Tahtouh
A new frontier is forming beyond traditional banking, and it's growing fast as a new generation of users want to use alternative financial products like cryptocurrencies and stablecoins through the internet, encompassing VR and AR immersive technology.
While still in the early stages, it is evident that financial institutions can leverage cryptocurrency, DeFi, and the metaverse to develop these innovative products and services to meet the evolving needs of their customers and prepare for and position themselves to remain competitive.
Originally created as an alternative to the traditional financial system crypto assets like Bitcoin are now entering mainstream banking. In Australia we're starting to shift conversations beyond just designing and implementing new banking technologies, to exploring how to integrate and regulate them.
At the same time, members of the financial services ecosystem are actively testing new wholesale markets using Stablecoins. This crypto asset is set to play a huge role in the development of Web3, the next generation of the internet powered by distributed ledger and cryptocurrency technology.
While crypto assets are still developing and have not yet reached maturity, it is important for financial institutions to continue balancing product and service innovation with their obligations to customers. The use of stablecoins in wholesale markets and the potential implementation of regulated liabilities and central bank digital currencies on distributed ledgers should be actively explored.
With the growth of decentralised financial (DeFi) and the potential benefits it can offer, financial institutions should keep an eye on how they can integrate and regulate crypto payment rails into customer and merchant channels at a retail level. By keeping up with the development of these technologies, financial institutions can position themselves to remain competitive and meet the evolving needs of their customers.
Instead of only using distributed ledger technology for creating and trading cryptocurrencies, DeFi can support financial products and services, accessible directly by individuals with no intermediaries such as brokerages, exchanges or banks.
Automated lending platforms based on smart contracts on a blockchain are the most common form of DeFi, allowing borrowers to use their crypto assets as collateral for loans and lenders to earn passive income based on supply and demand. It has the advantage of directness, certainty, transparency, and execution in real-time that reduces costs.
DeFi has the potential to expand lending and reach underserved segments of the market, but it needs to be regulated before it becomes part of mainstream finance. Because DeFi has the potential to serve specific segments of the population that conventional financial services and products cannot serve, it is the most exciting and threatening technology for traditional lenders, because of its powerful user experience and benefits to consumers.
The metaverse is no longer just an idea in science fiction; it's becoming a reality in financial services, with an estimated potential of USD$1 trillion a year. The transaction layer of the metaverse presents the greatest potential for financial products and services, with increasing demand among consumers to trade their digital assets.
Banks need to decide how to approach the metaverse - wait and see, establish a foothold, or invest to achieve scale. Creative technology is making metaverse-like experiences in financial services more practical, and banks have the potential to provide personalised, contextual digital engagement.
To capitalise on this opportunity, banks must be proactive in their approach to digital engagement and have the technological and talent capacity to implement it. The metaverse has the potential to revolutionise financial services, and financial institutions need to plan and be proactive in their approach to capitalise on this opportunity.
It is important for financial institutions to be aware of the growing cybersecurity risks as fintech continues to evolve, particularly in the DeFi and metaverse spaces. Current cybersecurity protocols are not enough, and new interactive protocols will need to cover the entire attack surface.
Financial institutions can pre-empt potential cyber issues by shifting their approach from front-end compliance to back-end risks, using AI machines to curate transaction histories and match that information with data on fraud and cyber risks. Collaboration and data sharing will also be critical. The regulatory environment for DeFi and metaverse products is uncertain, and authorities are still determining how to regulate this distributed ecosystem.