CBDCs x DeFi: The Road to Transformation of the Finance Ecosystem
In 2017, when bitcoin hit the US$20K mark, blockchain technology and digital currencies were called a fad by most governing and regulatory bodies.
Several years later, bitcoin has surpassed the $50K mark, mass adoption of blockchain technology is on the rise, and the world is seeing governing, regulatory, and financial institutions navigating their way into this space. Blockchain technology has opened doors for next-level transformation in FinTech and DeFi is at the forefront of this movement.
Decentralized finance, mainly known as DeFi, refers to the transition from centralized financial systems to peer-to-peer finance enabled by decentralized tech. This technology is built on distributed blockchains.
DeFi has served as a launching pad for a wide network of integrated protocols and financial networks e.g. stablecoins. Traditional financial institutions are rushing to be part of this move, after years of pushback because DeFi has shown the world that decentralizing financial services at scale is possible and is fast becoming our future.
But this isn’t the only technology redefining financial services.
Central bank digital currencies (CBDCs) is a concept that is fast becoming reality that, in tandem with DeFi, could overhaul the trajectory of FinTech in the years to come.
A number of banks and other financial institutions have moved from decrying digital currencies to finding ways to develop and issue theirs in the near future. Studies have shown that 80% of central banks around the world have looming plans regarding CBDCs, with 10% of these institutions confirming that they are close to issuing their own digital currencies in approaching times.
CBDCs differ from most digital currencies that are present in the market in the fact that they are digital representations of the fiat currency — this is dependent on the country or region issuing the currency. Customers will be able to transact with these currencies in the same way they’ve done so with fiat currency, be it through transfers, digital payments, etc.
Read more: CBDCs: What You Need to Know About Them
The convergence of DeFi and CBDCs is a live representation of the adoption of blockchain technology by traditional institutions and is why industry leaders are marking this as redefining the future of finance.
As more central entities move to operate on decentralized platforms and utilize digital currencies, trust in blockchain technology could increase. A trickle effect may take place, from major institutions right down to the consumer.
DeFi and CBDCs still face regulatory and structural challenges before this can happen, but the last 12 to 18 months have shown that these are not obstacles which can’t be overcome. Several years ago, critics wailed that the implementation of blockchain technology wouldn’t scale. But, this has proven to be untrue.
DeFi continues to prove critics wrong, reinforcing the fact that it is more than a fad or a passing phase. If anything, it’s clear that this tech is here to last and the world could be better for it. Over the course of the next decade, given the current growth rate in DeFi, we should expect to see more global adoption and a paradigm shift towards digital currencies. Time is the only determining factor here.