The traditional financial ecosystem has often been criticised for its loopholes, allowing market manipulation by big players such as banks and asset managers. In most markets today, these financial institutions act as intermediaries between the masses and financial services, giving them an upper hand in the value chain. This advantage now threatens the core fundamentals which bind financial market ecosystems.
The banking industry may have begun to boost economies, but it has evolved to a cartel-like business with some big fish controlling the markets. Recent years have seen major banks, including JP Morgan, HSBC and UBS, fined by regulators for violating market rules. Notably, some of these institutions were allegedly involved in laundering drugs for cartels and transacting business with sanctioned countries such as Iran.
A Rigged Financial Ecosystem
With all this happening right under the noses of financial watchdogs, the big question is, why are they not taking much action? A small fine and the banks are back to business as usual. Both scholars and market experts have made many arguments, and they all seem to point to the same factors. One of the main reasons the banking misdeeds has gone unchecked for long is protection from prominent beneficiaries, including politicians and billionaires.
Banks are incredibly profitable, which in most cases is enough to grease the palms of a few politicians for policy favours, amongst other goodies. These long-standing institutions enjoy the support of prominent governments such as the U.S, which was quite laid back on regulation until the 2008 financial crisis. Nonetheless, bankers continue to have their way, given their massive capital base.
The amount of trust placed on banks has enabled them to operate as corporate cartels or, as the saying goes, ‘Give a man a gun and he can rob a bank. Give the man a bank, and he can rob the whole world.’ Unfortunately, this has been the situation for the past decade, with major banks being involved in money laundering or market manipulation.
Some of the well-known events in which banks were caught pants down include the 2008 financial crisis. This crisis was a result of banks selling subprime mortgage loans whose long-term value could not be guaranteed. It is noteworthy that the same banks would later short the subprime mortgages upon realising that most people would default. Even worse, the banks did not disclose this information to clients who bought subprime mortgages from them.
Apart from market manipulation, the same banks were caught laundering money for drug cartels and politicians. The infamous Panama papers exposed a trail that led back to top global leaders, including Russia’s President Vladimir Putin. Meanwhile, leading banks such as HSBC and Credit Suisse recorded the most requests for offshore companies for their clients.
Why Blockchain and Crypto Pose a Threat to the Bankers
Having broken down how banks take advantage of the traditional finance ecosystem, one can see why most are opposed to blockchain and cryptocurrencies. These new technologies seek to revolutionise finance by introducing decentralised products and services. Ideally, they eliminate the middleman, who in most cases are the bankers and asset managers.
Unlike traditional finance, crypto products are built on decentralised blockchain infrastructures. This innovation has led to an emerging niche dubbed Decentralized Finance (DeFi), where protocols built on blockchain networks offer financial services. Moreover, they leverage smart contract technology for automatic execution hence eliminating the need for financial intermediaries.
Today, we have DeFi protocols that offer financial services ranging from market products to decentralised data storage. One such ecosystem is the YeFi.one protocol built on the Yotta public blockchain and compatible with Binance Smart Chain (BSC). This platform allows users to access DeFi services such as lending, borrowing, and staking to earn rewards in governance tokens.
In addition, the YeFi.one platform offers guaranteed security compared to traditional financial ecosystems. The project’s smart contracts have been extensively audited to play the role of financial intermediaries. In essence, anyone can access financial services from this protocol without having to hustle through the skewed banking ecosystem.
Is Decentralization the Future of Finance?
Though bankers may be determined to slow crypto adoption, it is slowly becoming evident that people prefer decentralised ecosystems. Even big banks like JP Morgan seem to be toeing the line; the bank recently remarked that Ethereum’s upgrades could fuel the $9 billion staking industry to $40 billion by 2025. A report by the bank further highlighted that,
“Not only does staking lower the opportunity cost of holding cryptocurrencies versus other asset classes, but in many cases, cryptocurrencies pay a significant nominal and real yield.”
Should the paradigm shift to DeFi take place, most banks face the imminent threat of becoming obsolete. However, this will likely mark a new beginning for the financial ecosystem where all stakeholders participate equally while code is king. Die-hard crypto enthusiasts have since branded DeFi as the future of finance.
Banks may have been pivotal to economic growth during the 20th century, but technology is now giving this old industry a run for its money. Over time, more people will likely embrace blockchain technology and crypto-assets. This explains why regulators are starting to fast track crypto regulation efforts. The next few years will mark a critical stage in the evolution of traditional finance as decentralised markets become a dominant force.
The opinions expressed in this publication are those of the authors. They do not purport to reflect the opinions or views of InvestingCube or its members.