Written by: Jonathan Daggett
Decentralized finance (DeFi) has gained popularity over the past few years and is beginning to reshape the way we think about financial transactions. DeFi offers lower costs and higher speeds compared to traditional financial transactions, but is often perceived as high risk due to its anonymity, low participation restrictions, and limited regulations. Fortunately, permissioned DeFi may provide a solution to these issues.
Permissioned DeFi protocols are private blockchains that require identity validation for network access, unlike public blockchains like Ethereum, which are open to anyone. As the banking industry explores ways to leverage this technology, permissioned DeFi is emerging as a potential solution to enhance existing financial systems and offers new products and services to customers. Here are some cases in which permissioned DeFi can be utilized:
- Payment Settlements: One of the most significant areas of traditional finance that can be improved is payment settlements. Permissioned DeFi networks offer faster and cheaper transactions than those provided before. While traditional routing methods such as checks as well as ACH and wire transfers can take several days to clear, DeFi transactions can be validated instantly, regardless of bank hours through blockchain’s technology.
- Trade Finance: Banks can use permissioned DeFi to streamline the trade finance process, reducing the time and cost associated with paper-based documentation. Currently, this process relies on a complex network of banks, customs officials, and shipping companies, which results in a slow and expensive process. Permissioned DeFi platforms can facilitate smart contracts that automate the entire trade finance process, from letter of credit to payment settlement, reducing the risk of errors and fraud.
- Cross-Border Payments: In 2022, global cross-border payments are believed to have surpassed $155 trillion. Unfortunately, these types of payments are often slow, expensive, and prone to errors. Banks can use permissioned DeFi platforms to settle cross-border payments in real-time, 24/7, and at a reduced cost. Permissioned DeFi platforms facilitate instant settlement by leveraging smart contracts that automate the entire process, reducing the time and cost associated with traditional cross-border payment systems, getting people access to their funds almost instantaneously.
- KYC and AML: Know-Your-Customer (KYC) and Anti-Money Laundering (AML) compliance are important aspects of banking operations. Banks can utilize permissioned DeFi platforms to create digital identities and streamline the customer verification process. This will reduce costs and time compared to manual verification techniques and result in secure and efficient customer onboarding. Smart contracts also have the potential to improve functions such as global sanction screening, watchlist screening, and adverse media screening.
Permissioned DeFi has the potential to improve traditional banking by decreasing the cost and improving the speed and security of financial operations while remaining compliant with the Bank Secrecy Act (BSA). Banks should take advantage of the benefits presented by permissioned DeFi to enhance and improve their institution’s offerings.
