Sibos 2021: an off-centre future for banking?

Beyond crypto hype and meme assets, tokenisation presents real and compelling opportunities for change in the financial services sector. One is the concept of decentralised finance, or “de-fi”. Development in this space will be a topic of heavy discussion at the upcoming Sibos financial services conference starting October 11.

To pull apart this this topic and more, ANZ Institutional’s Head of eFICC Markets, Luke Marriott sat down with Richard Schroder, Head of Digital Asset Services; Nigel Dobson, Banking Services Lead; and Hari Janakiraman, Head of Industry an Innovation, Transaction Banking at ANZ. Below is part two of an edited version of that discussion.

The panel continued by addressing exactly what decentralised finance is. 

RS: At its simplest, decentralised finance are financial services built as open-source software on a blockchain.

There are actually over one hundred “dapps”, or decentralised finance applications, and these applications cover a range of financial services across deposits, lending, derivatives and exchanges. In total, there's about $US85 billion in value tied up in these services.

Now, that's not a big number in global banking circles. So why is that relevant to us? Well, last year that $US85 billion was $US20 billion, and the year before that it was $US5 billion. That’s exponential growth.

All the feedback I’ve seen suggests many dapps are great applications to use. But what's most interesting is how they are built. These applications are a combination of digital assets, smart contracts and underlying protocols. And they're being built by very talented developers and finance professionals, not just a bunch of cypherpunks.

These are highly functional communities, many of which are well-governed, in terms of the direction of the protocols, by the underlying governance tokens. And the developers themselves are highly incentivised.

So you have a decentralised organisation of thousands of developers seeking to build out alternative financial infrastructure - and then building applications on that common infrastructure in an interoperable way.

If you add all that together, I think it's quite significant opportunity for incumbent financial services groups. And indeed, ANZ is exploring this area, and while it’s early days, it’s quite exciting.

LM: You talk about the decentralised finance world in contrast to the traditional, centralised finance world. How do you see these two worlds coming together in the future?

RS: At ANZ, the way we're thinking about it is pretty simple. On what basis could we, or should we, adopt some of these de-fi protocols?

In that way, to the extent we can actually work through the risk management, governance and regulatory obligations to get comfortable with these protocols and their underlying financial services, then you will see a convergence to centralised finance, in my view.

LM: And Nigel, it's certainly an exciting space we're entering here. How do you see this affecting financial services businesses like ANZ?

ND: Well, I think it's a classic mix of threat and opportunity. And we need to sift our way through that.

I think it's about acknowledging there are alternative technologies out there which offer potentially better outcomes than what we traditionally provide.

But there's also a regulatory perimeter within which we still have to operate. Now, my belief is, as Richard described, that these de-fi protocols will probably start to converge eventually with more traditional finance. Or we will bring the elements of that decentralised and tokenised finance into our permissioned environments, and allow the attributes that reside in those types of marketplaces to be leveraged with our customer experiences.

And so I think the element of governance, of the protocols themselves, and the regulatory perimeters we need to operate in, in order to ensure we have the trust and security our customers demand of us, is really important.

As they say, threat and opportunity are always related. It's a threat for us if, as banks, we do not act. It's a threat for us if we do not realise and understand the potential for improvement in the services we deliver today and in the future.

And therefore, the opportunity is embracing these, but with guardrails of regulatory governance and trust. That is going to be an essential element of our ongoing banking services.

For me, it's about dealing with the convergence of those threats and opportunities, and aligning them to the needs of our customers. As our focus remains on solving problems for our customers.

So where the attributes of these tokenised assets makes sense to solve problems, or generate new opportunities for creation of value for, both for ourselves and our customers - that will lead us down the path of future development.

RS: De-fi has a role to play in financial inclusion, too. The emergence of de-fi, off the back of the emergence of crypto, has in my view, come from a good place from a financial-inclusion perspective.

It's actually about trying to improve the financial system globally, to create a more robust system. Better technology, increased efficiency, and greater financial inclusion.

ANZ is supportive of bringing that type of thinking into the bank to improve our services for our customers. 

ND: I think moving forward, we're going to see a lot more collaboration within the industry. The important thing the de-fi world has already shown us is very networked businesses or business models can be successful, and the scale really matters.

Obviously, when you think about some of the benefits of the use cases that are most prominent - for example, cross-border payments - clearly we are talking about scale on a global basis. And I think we're best placed collaborating as a banking community, both within Australia and with other key geographies.

I think that has become a hallmark of the digital currency landscape. And ANZ has a view that we want to lead in that space, and we want to be able to drive that domestic and international scale.

HJ: To swing back to the regulatory point from before - I believe there’s an opportunity for institutions like ANZ to work closely with regulators, to help from a framework for how this tech will operate.

Decentralised finance by nature can go completely unregulated, but investor protection is critical. This is something that we all need to be prepared to work on.

LM: Thanks, Hari. You raise a really good point, the regulatory piece, it has to be a big focus, no doubt.

In my view, I think we’ll see a greater understanding of the problem, and an increase user maturity and trust, as more people progress to it.

For instance, if you can get cheaper financing in a de-fi world, people will progress to the market. But one of the limiting factors is just the volatility of the medium of exchange today. If we can bring stability to that market, I think that will instil confidence.

RS: Yes, and not all de-fi networks are created equal. Of the hundreds we see today, there are differing levels of how they are governed, how they evolved, and risks associated with them.

This is a whole new area that needs to be understood, and one at ANZ we're seeking to understand.

We're not going to move to a de-fi financial system overnight. It’s going to evolve over time.

What our customers need form us is that reliability and certainty of the existing centralised system - and the regulatory frameworks that support that - alongside the best of what is emerging through the de-fi landscape.

Banks like ANZ have a very important role to play. We're very good governance. We're very good at verification. We're highly trusted by our customers.

We're very well placed to help guide this process from the centralised finance system that we have, to an improved financial system to take advantage of de-centralised technology.

Luke Marriott is Head of eFICC Markets at ANZ Institutional