Decentralized finance – DeFi – can bring financial services to people who have been excluded up to now – banking the unbanked. Civic CEO Vinny Lingham says it has to unbank the banked first.
DeFi, or decentralized finance, is much more than an abstract concept. It has become a movement that leverages blockchain technology to enable peer-to-peer (P2P) lending and transfer of funds without intermediaries or central authorities. DeFi allows virtually anyone to access financial services with a high level of autonomy and few entrance barriers.
The concept of financial inclusion reaches back to the beginnings of cryptocurrency: Bitcoin and other crypto projects have promoted their business models with the benevolent cause of “banking the unbanked.” The potential of blockchain technology and the spread of crypto-based financial services would shape a new world of decentralized finance. This world would be characterized by wider global accessibility, more secure transactions and lower transaction costs. People who have been without bank accounts up to now would be welcomed into a world of convenient financial services. The unbanked would become banked.
Bank the unbanked or unbank the banked?
Serial Internet entrepreneur and Civic CEO Vinny Lingham sees things somewhat differently: “We need to unbank the banked, not bank the unbanked,” he said in a call from his San Diego offices.
Well-known in the crypto space as the “Bitcoin Oracle,” Vinny has industry knowledge and experience reaching back the beginning of the 21st century. The South African entrepreneur is co-founder and CEO of the identity management and protection company Civic. Previously, he was founder and CEO of two multimillion-dollar startups, Gyft and Yola Inc. Vinny has also partnered with one of his earlier co-founders to establish the South African investment fund Newtown Partners, which invests in early-stage startups to drive them toward success. In addition, Vinny is a member of the panel in the investment reality show Shark Tank South Africa and has appeared as a “Dragon” on the South African edition of Dragon’s Den, the longest-running UK investment reality show. He has been honored by the World Economic Forum as a “Young Global Leader” and ranked among the world’s top 500 most influential CEOs by the financial publication Richtopia.
In Vinny’s view, the financial industry has been opaque and sluggish with respect to innovation. The old infrastructure has closed the doors to further expansion of banking services and has made the industry unscalable. Despite the emergence of new technologies like AI and voice assistants, the costs and centralized nature of the modern banking system hold back advancements.
Financial services can’t scale
“I think we have got to a point where financial services can’t scale,” says Vinny. “The reality that we face with this situation, the narrative for many years, has been to open accessibility to more people to use financial services. But the existing banking paradigm has a bunch of risks, costs and consequences, as well as censorship globally, which make it really difficult to scale. For example, if we look at interest rates, look at the difference between what you are receiving and what you are paying, and the profits the banks make. If we think about the way we consider banking, it’s really centralized by nature. You go to a bank, you put money there, they lend it out and you receive interest. Financial services are broadly someone looking after your money, and they are taking a cut.”
A decentralized financial system based on a public blockchain could provide access to financial services to everyone, regardless of location and status. Vinny sees the decentralization of financial services as an overarching solution. “How do we decentralize it? How do you create services that are better than banks, which are cheaper, faster, available seven days a week? With the Bitcoin network, you can do banking seven days a week. How do we get to the point where money network services are better than banks, and we can go to people with bank accounts and say, ‘why aren’t you using money networks instead?’”
Listening to Vinny explain the concept of a decentralized “money network,” it all seems quite logical. “I think people are creatures of habits. They are not going to change if it’s slightly better. It needs to be materially better.” Vinny emphasizes the need to build the services, the network and the product. These have to be so much better than traditional banks that people who have bank accounts, assets and resources see clear advantages and make the transition. “That’s really where unbanking the banked works.”
The facts on the ground appear to verify this view, with numerous startups and large corporations recognizing the potential of open-source networks to change and decentralize economic activity. DeFi is introducing peer-to-peer networks and removing the middlemen in old banking services like lending, remittances, exchanges and insurance.
And yet, the age-old centralized arrangement of banks remains firmly in place. Only a handful of workable DeFi products are currently available, and very few of them have produced an extensive set of services or created a substantial buzz in the market. One of them is MakerDao, a decentralized lending service. As of January 8, 2020, it had a market capitalization of US$ 493m and approximately US$ 387m locked as collateral in its ecosystem. Vinny thinks security and non-custody of funds are two major concerns that the DeFi companies need to address to drive mass adoption of unbanked services.
The long haul
In fact, unbanking the banked may be the easier part. But if large-scale adoption of DeFi across affluent populations is proving elusive, how much more difficult is it to fulfill the promise of true financial inclusion among people with limited resources?
In Vinny’s view, the answer lies in tokenization. “What happens if we get to a world where people can actually get tokenized ownership of their property? So I have a token says I own this property and I can then use it on a decentralized financial service. You lend me money against that property.” Tokenization of assets has made the fractional ownership of the assets and micro-investments possible. The investor is no longer obligated to hold a complete unit of a physical asset or a commodity. This opens a new dimension of opportunity where anyone in the world can invest in extremely illiquid and out-of-reach assets like real estate. “I think we’re going to quickly move with companies like Harbor and many others that allow you to lend money against tokenized investments properly.”
DeFi companies are also expanding the scope of tokenization to intangible assets and debt securities like equity, credit default swaps and margin loans. Vinny points out that even private data like a person’s credit score can be an asset that can be tokenized. A network that accepts a credit score as an underlying tokenized asset would enable lenders to decide the amount, duration and the interest rate that should be offered to borrowers based on their credit scores.
The Bitcoin Oracle
No discussion of blockchain-based financial solutions would be complete without looking at the original cryptocurrency, Bitcoin. Vinny served as a board member of the Bitcoin Foundation from December 2015 to October 2019. He attributes his reputation as the Bitcoin Oracle to his understanding from the early days of the cryptocurrency. But he points out that a lot has changed since 2017, including the entire Bitcoin narrative. Investors see it as a store of value rather than as an alternative to fiat money. Its price now moves independently of any technical indicators. Vinny says he is happy not to be the Bitcoin Oracle anymore.
At the same time, there is no denying that Bitcoin and other cryptocurrencies are increasingly accepted as a mode of retail payment in various stores and organizations around the world. The question is when a tipping point might be reached, where cryptocurrency acceptance and decentralized financial services become the rule rather than the exception. Vinny envisions tokenized assets as the key to enabling the money network he described. At some point, he expects people to stop using banks to borrow money because “networks will give much better interest more securely.” He adds, “But yeah, it would never be for everyone, but I think in ten years it will be growing faster than the banks. It will become a threat to banks in ten years, not in three or four.”
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