Introduction
Decentralized finance is undeniably transforming the financial world, bringing something new to the table which has gained attention in recent years. Furthermore, the main highlight of this new financial system are the decentralized solutions that pose a challenge to traditional banking systems. Thus, by bringing more real-world assets and financial products on chain, DeFi really is expanding its landscape which further attracts more investors.
While traditional finance is well aware about DeFi and has been slowly adapting their system, they can not afford to ignore the potential threat it establishes. Thus, rather than seeing DeFi as a threat, banks should consider it as an opportunity.
Furthermore, in this guide, we will explore what proactive steps banks should take to adapt in the ever-evolving financial system to stay competitive and relevant.
The Growing Influence of DeFi - Why Banks Need to Take Notice
As decentralized finance continues to evolve, it is becoming more appealing and interesting to both consumers and investors. And while it's still a small fraction in the trillion dollar traditional finance industry, its potential growth in the scene is definitely undeniable with a trajectory going upwards. This increasing adaption and popularity has resulted for financial institutions to recognize DeFi's strong potential in challenging traditional banks in the long run as well as gaining a significant involvement in the industry in general. Moreover, many large banks have now started establishing crypto research divisions to further evaluate how decentralized ledger technology and DeFi protocols can improve their existing process.
This has been pushed through mainly because of the increasing demand for higher returns and better transparency provided by DeFi compared to traditional financial products. As DeFi brings more attractive offerings to the table, the growing interest that comes along with it from different sectors suggests that decentralized finance is indeed more than just a passing trend, it's here to stay, and will likely continue in reshaping the future financial landscape.
Key Actions for Banks to Stay Competitive in the DeFi Era
As mentioned, despite DeFi still being relatively small in the context of global finance, banks should still not disregard its growth, most especially that it poses a challenge. Instead, traditional finance should respond strategically and gradually to keep up with the changing landscape and stay competitive. This can be done through implementing key actions in embracing DeFi and integrating it into their services.
Catering customers demand for DeFi products
To begin with, the very first step banks should consider to keep up with the pace is to offer their customers access to DeFi services. As the saying goes - if you can't beat them, join them - perfectly applies to this scenario. As more individuals seek out decentralized products, banks should be recognizing this shift and accommodate these preferences instead of viewing it as a competition to their products. By acknowledging that DeFi and cryptos are here to stay, banks can serve as facilitators of this new financial system.
Targeting new generation investors
Gone are the days that middle aged individuals were only interested in investing. In today's time, investors get younger and younger, including the millennials and gen z. This interest from them is mostly driven by the new era of investments such as digital and crypto assets, motivating the tech-savvy generations. These groups of investors are seeking financial products that are aligned with their values, preferences, and goals, which is exactly what DeFi offers. Thus, banks can use decentralized finance as an opportunity to meet and cater the demands of this demographic by adapting its system, just like the way they embraced the rise of the internet in the 1990s.
Embracing the DeFi innovation
As the DeFi ecosystem continues to evolve, banks should proactively engage with the sector to secure their seats at the table. This involves collaborating with the DeFi community to develop new products and services that aligns with the principle of decentralization while maintaining regulatory compliance to enhance user protection. In addition, banks can also work with regulators in creating a safer financial environment for participants while preserving innovation and the decentralized nature of DeFi, making it an attractive alternative to traditional banking. Thus, banks can keep their system as secured as possible making their operations innovation-focused. Moreover, as they foster their collaboration between compliance and technical departments, traditional finance can explore new ways in integrating DeFi into their system and remain relevant and competitive in the long run.
Building bridges between CeFi and DeFi
DeFi's growth is unstoppable and is becoming more mainstream in the finance industry, thus, banks should focus on creating bridges between the centralized and decentralized finance. This involves the development of a secure and compliant pathway where institutions and consumers can participate in both ecosystems. One popular platform that has already started in building a bridge to this gap is Coinbase which banks can use as a reference on how they can proceed.
Conclusion
The rise of DeFi is really a game changer in the financial industry and as it continues to grow in popularity and adoption it presents both a challenge and opportunity to traditional banks. But if banks will choose to recognize the potential of decentralized finance and take proactive steps in integrating it into their system instead of viewing it as a threat, banks will not only survive but also thrive in the new financial ecosystem.
