DeFi protocols with appropriate guardrails will bring significant efficiencies to FIs: report

New business opportunities are likely to emerge as financial institutions take advantage of the composability of DeFi protocols

Building full-scale financial services with institutional decentralised finance (Institutional DeFi) is able to bring financial institutions substantial cost savings if they have a participation strategy ready to capture its value, according to the “DeFi – The Next Generation of Finance?” report.

This is as code dramatically reduces middle and back-office operations across firms and intermediaries, the joint report by Oliver Wyman Forum, DBS, Onyx by JP Morgan and SBI Digital Asset Holdings.

Existing DeFi protocols are not designed for financial services. It thus needs safeguards such as identity solutions to enable trust and compliance, says the report.

A safer alternative, defined as Institutional DeFi, combines the power and efficiency of DeFi protocols to tokenised real world assets with a level of safeguards to meet regulatory and customer requirements.

New business opportunities are also likely to emerge as financial institutions take advantage of the composability of DeFi protocols, packaging multiple DeFi protocols together to offer new solutions. However, firms must adapt the DeFi protocols to the regulatory standards of today’s trillion-dollar markets for money, stocks, bonds, and other assets, the report adds.

As Institutional DeFi will likely vary by jurisdiction and market structure, the report suggests three ways for financial institutions to respond — develop a house view on the DeFi implications across business portfolios; decide on a participation strategy to adapt existing business and embrace new opportunities enabled by Institutional DeFi; and get the organisation ready to fulfil its ambitions by developing the required capabilities.

Meanwhile, the report also calls for joint actions from regulators, financial intermediaries, clients, and other third parties — including DeFi communities — to address legal and regulatory uncertainties, establish shared standards, and seek to forge a common vision of how the market should operate.

The launch of the report coincides with the Monetary Authority of Singapore’s (MAS) latest update at Singapore FinTech Festival on its first pilot under Project Guardian, which aims to test the feasibility of applications in asset tokenisation and DeFi while maintaining financial stability and integrity.

Aside from providing insights into the use cases of Institutional DeFi and collaboration opportunities within the digital asset ecosystem through Project Guardian, the report also draws on the hands-on experience of coauthors DBS, Onyx by JP Morgan, and SBI Digital Asset Holdings, which are leading the first pilot under Project Guardian.

DBS managing director and group head of strategy and planning Han Kwee Juan says Institutional DeFi lays the foundations for global institutional liquidity pools that enable increased trading velocity, greater transparency, higher efficiencies, lower settlement risks, and economies of scale.

“It is early days yet, but with bold thinking, commitment to innovation, and constructive partnerships, there will be a vast array of possibilities to reshape and reimagine the boundaries of financial market infrastructure,” he adds.

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