For most bank sector employees, decentralized finance, or DeFi for short, still doesn't mean all that much. It is a loose, diffuse term that they can't get their heads around. The problem is the term implies several elementary methods of institutional practice that function outside the traditional world of finance – but are also just as much based on the values of trust, security, dependability, and identity.

Simply put, DeFi is a digital ecosystem that divvies and distributes computing or processing power to many hosts while not being controlled at or by a single, central source. Transactions are executed by way of Smart Contracts processed on the Blockchain, where they are both accessible and traceable through the Internet. The Blockchain protocols are compatible and can be combined to provide various services, with digital currencies, such as Ethereum, functioning as payment vehicles.

Bitcoin ETFs Up Widespread Acceptance

When taking that perspective, it becomes more than clear what kinds of challenges banks currently face. In other words, financial institutions that do not anticipate the current inflection point, along with its changing paradigms, will lose their right to exist in the short or the long term. That will happen regardless of their adherence to the much-praised practice of Swiss banking.

The Bitcoin ETFs recently approved by the US Securities and Exchange Commission (SEC) were a first step towards increasing widespread acceptance of cryptocurrencies. «For the first time, investors are in a position to buy virtual assets using traditional channels», indicated Jan Brzezek, founder of Crypto Finance, now owned by Deutsche Boerse Group, on Thursday at the «Decentralized Lugano» conference.

BIL-Suisse team (Image: NB)

It is the third time that the event in Ticino is being organized by Banque International à Luxembourg (BIL Suisse) and digital asset investment firm Scytale Digital, and it could again count on a field of highly-ranked experts and specialists in the digital finance world in the broadest of senses.

Using Bitcoin for Taxes and Fines

There is a reason it is being held in Italian-speaking Switzerland. BIL Suisse has a branch in Lugano besides the ones in Zurich and Geneva. Besides, the city has been profiling itself as a center for European blockchain activities for the past three years. As part of that effort, the city now allows several communal services, including taxes and fines, to be paid with Bitcoin, Tether, or Luga, as Lugano's deputy head of finance Paolo Bortolin maintained.

Sascha Wullschleger, Paolo Bortolin, Thomas Moser, David Newns, Vincent Gusdorf (Image: finewsticino.ch)

As finews.com reported, the city issued the first Swiss digital bond last year. They followed that up this year with a second, as a world first, by using Central Bank Digital Coin (CBDC) for settlement, according to Thomas Moser, member of the Enlarged Governing Board of the Swiss National Bank (SNB).

Moving Away from Facebook and Google

Experts have little doubt that DeFi will experience a massive breakthrough over the next few years because it makes «many transactions more efficient and cheaper, and the money flows transparent and traceable», underlined Vincent Gusdorf, Head of DeFi at Moody's. The rating agency gave Lugano's bond an «Aa3».

But there are also some hurdles ahead before an independent financial system becomes established globally, something that was intensively discussed at «Decentralized Lugano». The question of digital identity is key, as Michael Casey, pioneering publicist and crypto-expert says. A digital standard is necessary for an individual to identify themselves in virtual environments without being dependent on Google or Facebook.

Dubai's Blockchain Strategy

Having such an identity for use in various ways in different countries would disclose the necessary information as a single source of truth for legitimacy checks (Know Your Customer, KYC, and similar) as Micha Bitterli, a finance expert at the Deloitte consultancy maintained, something the company is working on.

Countries that are already looking at this question will have a large advantage in the medium term when it comes to establishing themselves as a hub for decentralized finance, Mark Cachia, founder and CIO of Scytale Digital, explained. He mentioned Dubai in that respect, where he currently works and lives, and where authorities have started a «Dubai Blockchain Strategy» to create an optimal framework and environment for DeFi.

Some Movement

But Switzerland has nothing to hide at all either, says Sascha Wullschleger, Head of BIL Suisse in Lugano. The SNB plays a leading role internationally when it comes to the development and use of CBDCs and both Lugano and Zug have established themselves as international crypto hubs. Of the more than 200 banks active in Switzerland, more than 35 financial institutions are already providing digital asset services. «Blockchain is no longer seen as something exotic but as technology,», added Hans-Peter Borgh, the CEO of BIL Suisse.

Private bank Maerki Baumann's crypto brand launch (Image: finews.ch)

Indeed, something seems to be afoot in Swiss banking recently. Several institutions, including private and cantonal banks, are offering crypto assets and related services, something that finews.com has repeatedly reported on. Interest in Switzerland was also high related to the recently launched Bitcoin ETFs.

Only Digital

That should be a clear sign that DeFi is on an unstoppable march and banks that stand on the sidelines today will become victims of consolidation tomorrow. At the very latest, they are more than likely to disappear when the generation of clients who have known nothing but digital banking takes hold.