DeFi – Why It Can Never Replace The Traditional Financial System

Decentralized finance (DeFi) will continue to complement the traditional finance system rather than supplant it in 2022, says a report by financial information and analytics provider S&P Global.

According to the firm’s Global Credit Outlook for 2022, the traditional finance sector will need to innovate and invest to remain relevant in the coming twelve months.

“We believe it will continue evolving in 2022 toward complementing the current financial system rather than substituting financial services companies.

To remain relevant, we think incumbent players will have to further step up investments in new technologies – otherwise, the balance could shift away from them in the longer run.”

While most decentralized finance applications are not competing with traditional finance at the moment, the report says that the situation could change in the future.

“Most DeFi applications (DApps) currently don’t compete with incumbents.

They are mostly still restricted to transactions within the emerging digital ecosystem – for instance for the purchase, exchange, lending, or insurance of digitally native assets.

But this could change as technology and acceptance evolve.”

Per the report, the most profitable activities in the traditional finance sector stand to be disrupted the most.

“DeFi’s potential is greater in higher-cost activities, which often provide higher margins to incumbents.

If DeFi captures a large share of existing liquidity, it could also amend the funding profile of incumbents.

Ignoring this trend might lead to a difficult wake-up call in the future, although we think this is a few years off given that DeFi is still in its infancy.”

The report also says that regulatory progress in 2022, if forthcoming, could bring more players in the traditional financial system into DeFi.

“Progress in the regulatory debate could both frame and spur growth in 2022.

Regulatory progress is a precondition for many traditional players to enter some DeFi activities with confidence and compete with players native to this ecosystem.”

Read the full S&P Global report here.