The next is a full textual content of a keynote handle delivered on the opening of BlockBali 2020 on December 1, 2020 and explores the influence of decentralized finance on the fortunes of the rising area.
Good morning, good afternoon and good night. Wherever you’re tuning in to us from, thanks for becoming a member of us for BlockBali.
My title is Patrick Tan, and I’m the CEO and Normal Counsel for Novum Alpha, a quantitative digital asset buying and selling agency, in addition to Normal Counsel for the Novum Group, a diversified cryptocurrency and blockchain companies firms with pursuits in media, software program improvement, buying and selling and companies.
It’s my privilege to welcome you to BlockBali 2020 and Novum Alpha is proud to be the gold companion for this yr’s occasion.
However what a distinction a yr has made!
As you possibly can see from the place I’m seated, I’m sadly not in Bali, one of the vital stunning locations on earth.
Like lots of you, I’m tuning in from my dwelling workplace due to the coronavirus pandemic, removed from the sandy seashores and crystal-clear waters of Nusa Dua.
For billions of individuals world wide, what we’re experiencing now, tuning in to digital conferences and attending on-line occasions, has develop into a brand new regular.
However whereas the coronavirus pandemic has little question triggered untold financial hardship, it has additionally created unprecedented alternatives and hastened dramatic shifts in expertise, finance and consumption, that will but show sturdy.
The race by nations to ship a lot wanted financial assist on the peak of the pandemic has highlighted the gross deficiencies in legacy monetary techniques, and introduced into sharp focus the billions of people that proceed to stay unbanked and lack entry to even probably the most fundamental monetary companies.
Nowhere is that this extra obvious than in Southeast Asia.
House to over 655 million folks, Southeast Asia is likely one of the most economically vibrant and culturally numerous areas on the planet, with over 100 completely different spoken languages and ten discrete currencies.
The area can be a cornucopia of contradictions.
Whereas Southeast Asia has a cell penetration price of 133%, the place some customers personal multiple SIM card, lower than a 3rd have a checking account.
Think about that Cambodia, which has the area’s highest cell connectivity at a staggering 173% additionally has a inhabitants which is 95% unbanked, in line with a report by monetary companies agency KPMG.
And in line with the World Financial institution, 80% in Indonesia, the Philippines and Vietnam are unbanked, with 77% for Myanmar, and round 30% for Thailand and Malaysia, whereas Singapore has about 2% with out entry to a checking account.
But entry to monetary companies is vital ingredient for financial improvement, with the flexibility to show creditworthiness and borrow cash, integral to lifting fortunes and ending endemic poverty.
Which is the place the event of decentralized finance or DeFi is available in.
Consisting of sensible contracts, protocols and decentralized purposes known as dApps, DeFi represents a push for a extra open, clear and inclusive monetary system constructed on the immutable decentralized ledger expertise that’s blockchain.
With growing regulatory burdens and better prices, conventional sources of financing are overlooking small and micro companies, a vacuum which may probably be crammed by DeFi’s capability to offer extra inclusive entry to monetary companies, and credit score at decrease prices.
Put merely, a DeFi mortgage consists of a wise contract, usually constructed atop the Ethereum blockchain, the place debtors and lenders put up their collateral, and an immutable sensible contract governs funds of curiosity and secures that collateral within the occasion of default.
The flexibility to earn curiosity, particularly the place the sums being lent are small, represents a major step ahead for monetary inclusivity, offering higher safety, in addition to alternative for the unbanked to take part within the monetary system.
For now, the nascent nature of the area has meant that such sensible contract loans have tended to be over-collateralized, in different phrases debtors have needed to put up extra collateral than they really borrow.
Over time, this might change, as some buyers could also be keen to tackle borrowing dangers in return for a better price of return.
Or as cryptocurrency wallets develop a classic, as an illustration demonstrating a daily historical past of reimbursement, the necessity to overcollateralize may probably come down for such debtors.
Contemplating that DeFi companies solely picked up over the previous summer season, it’s nonetheless early days for the area and the potential for microlending and borrowing, is exponential.
Nevertheless it’s not simply borrowing and lending that makes DeFi particular.
Corporations are additionally actively engaged on fund constructions that might solely be potential within the DeFi area.
The place as soon as, entry to fund managers and different institutional investor-grade autos was restricted to the well-heeled, a handful of corporations are engaged on making investments accessible to buyers of extra modest means, by sensible contracts and DeFi.
After the onerous classes learnt from Ethereum’s Decentralized Autonomous Group or DAO, which was an early conception of a decentralized enterprise capital fund, a lot improved DeFi funding autos have the potential to offer funding alternatives to even probably the most humble buyers.
The DAO hack, as unlucky because it was, and which led to the onerous fork within the Ethereum blockchain, no less than helped to reveal the vulnerabilities in early sensible contract iterations and supplied builders a listing of issues to keep away from for future variations.
Immediately, sensible contracts are hopefully extra sturdy, topic to group audit, and clear, which ought to assist to keep away from a number of the dangers related to the DAO.
DeFi then supplies a possibility for buyers and fledgling managers alike, with the transparency of the blockchain offering an unprecedented alternative to audit an funding supervisor’s monitor document, with out the necessity for fund directors or auditors.
Which means a fund supervisor with out the normal credentials comparable to a level from a prestigious college, has simply as a lot probability of elevating vital quantities of funding capital as one who does, primarily based purely on the success of their monitor document.
Remittances are one other space the place DeFi may revolutionize fund flows in Southeast Asia.
In keeping with estimates from the United Nations Division of Financial and Social Affairs, there are over 20 million migrant staff from Southeast Asia, however the true quantity, particularly for migrant staff inside Southeast Asia is prone to be even higher.
Information from the Asian Growth Financial institution, means that as lately as 2019, sending a $200 money remittance to the Southeast Asia area may entice charges as excessive as 6.3%.
And with remittances accounting for as a lot as 10% of GDP in nations just like the Philippines, large financial savings could be garnered by leveraging DeFi.
DeFi liquidity swimming pools, which may pit fiat currency-backed stablecoins towards one another in sensible contracts present an more and more frictionless means to each remit cash, in addition to facilitate a foreign money swaps by eradicating the legions of cash changers and center males that usually precise their pound of flesh from such transactions.
Bringing down the price of remittances may considerably enhance disposable earnings and generate vital welfare for households in recipient economies — a significant cause why the United Nations has made reducing the price of remittance transfers to three% by 2030, one among its Sustainable Growth Objectives.
However legacy techniques can solely achieve this a lot, and it’s estimated that relying on the origination of a remittance, a easy cash switch can cross by as many as seventeen intermediaries earlier than arriving at its closing vacation spot.
Given the importance of fund flows to Southeast Asia, the area shouldn’t be sitting again and doing nothing.
International locations comparable to Cambodia are launching a nationwide fee system primarily based on the blockchain, a precursor to its personal digital foreign money that might be extra simply transferrable between borders.
And with as many as 80% of central banks worldwide actively finding out the issuance of their very own digital currencies, it is just a matter of time earlier than DeFi could be leveraged to each enhance the effectivity of international alternate in addition to cut back friction in remittances.
As a result of decentralized exchanges that exist within the DeFi area have nearly no obstacles to entry, any digital token that’s constructed atop the Ethereum blockchain could be swapped for an additional.
And with the overwhelming majority of fiat-currency backed stablecoins constructed on Ethereum, the community impact ought to finally entice extra fiat foreign money stablecoins to the Ethereum blockchain, the place extra alternatives to swap fiat foreign money stablecoins are current.
Even when the fiat foreign money stablecoins will not be constructed atop the Ethereum blockchain, as has been seen from wrapped Bitcoin, nearly any digital foreign money could be put in an Ethereum wrapper to be used on the Ethereum blockchain, demonstrating how such limitations could be overcome.
Remittances, similar to water, will in the end discover the paths of least resistance.
And after they do, DeFi will play a significant perform in supporting that evolution in the direction of a extra frictionless means to each swap and switch worth.
However it could be naïve to suppose that DeFi in and of itself is a silver bullet.
Simply as there are nearly no obstacles to entry within the DeFi area, that very function permits for abuse.
And authorities will not be prone to take kindly to the absence of anti-money laundering and know-your-customer procedures on DeFi platforms.
Given the pseudonymous nature of blockchain transactions, it’s troublesome to see how governments might be in a rush to embrace DeFi, notably when it could be nearly inconceivable to police.
As a result of DeFi platforms are usually not created by an organization and in the end administered by the group, it could be onerous although not inconceivable for governments to successfully regulate them.
The continued existence of a number of the most heinous web sites on the web is testimony to the challenges confronted by authorities when not simply entry to data turns into decentralized, however entry to monetary companies as effectively.
Governments can also take umbrage at DeFi’s capability to keep away from the prevailing tax regime altogether.
Capital positive factors produced from buying and selling or investing on dApps would escape conventional taxation routes due to anonymity, depriving already hamstrung authorities from a lot wanted revenues to fund public infrastructure comparable to faculties, roads, hospitals, ports and airports.
And the small charges that decentralized exchanges cost for facilitating the sensible contracts which are used to swap digital currencies, would additionally for probably the most half keep away from taxation as effectively, making it difficult for governments, notably these that are much less technologically-enabled, to levy taxes on such actions.
Sadly, folks will keep away from paying taxes the place potential and Southeast Asia isn’t any completely different.
Decentralizing finance, notably in terms of lending, investing and remitting, makes it all of the tougher to gather such taxes.
But regulatory options to handle DeFi will not be efficient.
In contrast to centralized exchanges with workplaces and identified personnel, many DeFi initiatives are group run and by design decentralized.
Meaning attempting to manipulate or regulate such DeFi initiatives can be difficult at finest and inconceivable at worst.
Given the relative anonymity with which contributors within the DeFi ecosystem take pleasure in, it’s completely potential for illicit fund flows to make use of the numerous instruments accessible within the DeFi area to obscure these fund flows and to obfuscate the supply of funds.
This leaves DeFi prone to felony seize and supplies a canopy for corrupt officers to siphon away illicitly obtained funds with out ever having to open a secret checking account in an abroad nation, or navigate the complicated internet of shell firms in tax havens.
However simply because the web is agnostic as to its customers, being each a software for good and evil, the argument that simply because DeFi can allow unhealthy actors is inadequate cause for its improvement to be dismissed.
Simply as Africa leaped forward and ignored copper landlines, leaping straight to cell, Southeast Asia has the potential to skip forward from the clunkiness of legacy banking and monetary establishments, to forge forward with DeFi.
And issues from present stakeholders in each banking and finance, that DeFi will usurp their position could also be exaggerated.
Already, the rise of digital funds has meant that many legacy banks in Southeast Asia have been capable of lower prices by closing plenty of bodily branches, and such banks may tackle new roles, comparable to offering worth added advisory companies to digital foreign money pockets holders, together with funding recommendation.
DeFi shouldn’t be a zero-sum sport.
If nothing else, the expertise of Bitcoin has demonstrated that removed from undermining the legacy financial system, Bitcoin has really complemented it, appearing as a ballast in occasions of volatility and financial turmoil, whereas preserving central bankers on their toes and forcing them to take care of a watchful eye on inflation.
DeFi has the potential to do the identical.
Remittance firms which have lengthy loved their quasi-monopolies over a captive viewers, might be pressured to scale back prices and to make their techniques extra environment friendly.
Digital foreign money pockets addresses, supplied that proof of possession could be established in a practicable approach, is usually a new gateway for remittance firms to behave as intermediaries, in some instances offering ahead fee credit the place required.
And banks could need to take into account creating their very own DeFi options that fulfill all present KYC and AML necessities, whereas on the identical time having the ability to serve clients which they in any other case wouldn’t have the ability to serve due to value.
A method can be for banks to assign possession of explicit digital foreign money pockets handle to particular people, having carried out the requisite KYC and AML, after which to permit the blockchain to do the remaining, permitting the general public blockchains themselves to behave because the financial institution’s ledger, whereas preserving the shopper’s privateness by retaining the information of which particular person is tied to that particular digital foreign money pockets handle.
Given the in any other case excessive prices of sustaining financial savings accounts and branches, digitalization for banks is extra an inevitability than it’s an choice, and DeFi might help to hurry that improvement alongside.
Southeast Asia as a area has already acknowledged the potential of DeFi.
Regardless of some preliminary velocity bumps for digital currencies in Vietnam, the nation has since seen a blossoming of a number of DeFi protocols.
Singapore is within the strategy of awarding digital banking licenses subsequent yr and nations from the Philippines to Indonesia are all trying into how blockchain expertise in addition to DeFi can generate much more worth for his or her economies.
As Southeast Asia pushes for higher financial cooperation and integration, DeFi helps to create a extra stage taking part in subject, one which nationwide pursuits can neither management nor dictate.
If the purpose of monetary companies is in the end to serve, then the unlucky economics of legacy enterprise fashions have actually left tens of millions unserved.
And the place service is on the market, it’s each costly or inefficient.
For Southeast Asia’s tens of millions to profit from the revolution in monetary companies that’s happening, a greater and extra inclusive path will have to be solid.
And whereas the challenges going through decentralized finance will not be insignificant, they no less than characterize a grassroots and community-led response to an in any other case difficult downside — the shortage of entry to monetary companies.
To be honest, it was by no means going to make financial sense for profit-driven monetary establishments to supply companies to the financially feckless.
There’ll at all times be some components of society that may fall off the grid, however when the overwhelming majority of a area are unbanked, that isn’t a failure of the folks, however a failure of the system.
This was at all times going to be an issue that required out of the field considering and an out of the field answer.
And whereas DeFi is not at all a panacea, it’s on the very least, a step in the fitting path as a result of it requires no authorities intervention or political will, which may usually be discovered wanting.
As a substitute, DeFi represents what it means for folks to take private duty and possession of their very own monetary futures, and that in and of itself is nothing wanting a miracle.
As soon as once more, it’s my privilege and pleasure to welcome you to BlockBali and an honor to have a number of the main figures within the blockchain and DeFi area to grace this occasion.
While we’re unable to satisfy in individual this yr, let’s hope that will probably be quickly that we will.
Thanks for becoming a member of me and I hope you’ll benefit from the different speeches, panel discussions in addition to networking periods of BlockBali.
I pray that your expertise with BlockBali might be a fruitful and decentralized one, thanks.
