How decentralized finance will transform business financial services

Decentralized finance had a resurgence last summer. Cryptocurrencies like bitcoin and ether are now becoming more widely accepted for payments and USD Coin (USDC) has made significant progress towards being an asset that will maintain its value without future depreciation.

At the same time, the blockchain technology that underlies cryptocurrency and its supporting financial infrastructure are on their way to offering a system of financial rails in parallel to – and connected with – traditional financial infrastructure.

Both Coinbase and Compound Treasury have released USDC-based loans that guarantee at least a 4% yield (far higher than traditional products of a similar risk), and smaller platforms are offering cross-border access to capital with rates that are far more variable but would be unavailable otherwise. So far, this growth in loan products has come from the retail sector: individuals holding and trading crypto-assets for personal use. Banks such as Morgan Stanley and US Bank now offer crypto-products for their wealth management clients. But what about businesses?

Since its inception, DeFi – literally decentralized finance or blockchain-based forms of finance that do not rely on centralized intermediaries such as banks – has been adopted to some extent by smaller businesses in developing markets whose needs are unmet by the traditional banking system. For example, some businesses use payment companies like BitPesa in Africa, Tranglo in ASEAN and the major DeFi exchanges to either make direct payments or convert payment amounts to USD-backed stablecoin for cross-border remittance.

The greater transaction banking industry now sees DeFi as a potentially significant growth engine and disruptive force. Transaction banking addresses the operational needs and day-to-day transactions of businesses and financial institutions. Usually, only companies who are top customers of banks are able to have ready access to these services, which focus on managing the liquidity of a company, cash flows, trade and supply chain finance and other instruments needed to facilitate domestic and international corporate transactions. In 2020, industry-wide transaction banking revenue reached $1 trillion.

According to Samantha Pelosi, SVP of Payments and Innovation at BAFT, the largest trade association for transaction banking: “The…