Insight & Analysis

Technology trends: from DeFi to APIs

Published: Oct 2020

Enrico Camerinelli, Senior Analyst at Aite Group, shares his thoughts on treasury on demand and the rise of decentralised finance (DeFi).

Tall office blocks in the finance district

What topics are you focusing on at the moment?

I’m looking into two topics in particular. One is the notion of treasury on demand, which includes topics such as application programming interfaces (APIs), real-time payments and virtually managed accounts. The other, which is more forward looking, is the idea of DeFi – in other words, decentralised finance.

How would you describe treasury on demand?

Banks and fintechs have been driving education and awareness on Open Banking APIs, and have been teaching treasurers that it’s possible to connect all their enterprise and banking systems into one location through a single API gateway. So treasurers are seeing that it is possible to have centralised control of their positions, and also to execute orders from their own treasury system or ERP.

Treasury on demand is not to be confused with real-time treasury, as things don’t necessarily have to happen in real-time. For example, an invoice might take 30 days to be paid – the point is that when the invoice is due, or if the company needs to discount an invoice, then on-demand visibility is needed over that invoice. APIs and multi-bank visibility are what can make all these concepts happen.

What about DeFi?

When we talk about DeFi, we are speaking about blockchain-based applications that are managed automatically using smart contracts. DeFi is basically a set of financial products – such as deposit management, lending and borrowing – that you can do using cryptocurrencies. These cryptocurrencies are called ‘stable coins’ as they are stabilised by being pegged against major currencies like USD, EUR or GBP. This avoids the problem of cryptocurrencies being very volatile.

While DeFi is mostly used by individuals that might want to make some profit, I’m interested in this topic from the corporate point of view – particularly given the current interest in central bank digital currencies (CBDCs). Introducing central bank digital currencies into these DeFi constructs instead of cryptocurrencies would create more stability. At the same time, the mechanics behind it make it very compelling and very efficient.

Although DeFi is still in its infancy, there are examples that embed the germ of a new breed of applications and instruments that I expect to take life and – once properly adapted – populate the DeFi ecosystem.

For example, five major Spanish banks (Banco Sabadell, Banco Santander, Bankia, BBVA, and CaixaBank) have completed a proof-of-concept test to execute payments triggered by smart contracts. Goldman Sachs created a new digital assets business line with the vision that in the next five to ten years, the financial system would operate with assets and liabilities native to blockchain. Finally, Banque de France is working with eight firms in testing applications that are designed to explore new ways of exchanging financial instruments for central bank money.

To what extent has the Covid-19 crisis helped or hindered the development of new digital solutions?

On the one hand, the pandemic has pressed the paused button – a lot of people are stopping and thinking about what comes next. But the other comment I’m hearing is that the pandemic has accelerated some decision processes that were already there.

Things like DeFi and virtual account management weren’t invented as a result of the pandemic, but they’ve been accelerated – so rather than being nice to have, they are now becoming urgent. So I would say the overall effect of the pandemic is to put aside things that aren’t absolutely necessary, and instead focus attention on things that can help reduce costs and improve visibility.

Knowing where assets are in the financial supply chain is important – but the impact on the physical supply chain has been much more significant. At this point, holding inventory is not necessarily negative, and reducing transportation costs and production costs is not always the best choice. So traditional models have dramatically changed – and sustainability is also becoming important, because people are realising that anything is possible.

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