Revolutionary changes in banking are underway. With governments and central banks around the world exploring central bank digital currencies in anticipation of a rapid transformation, retail banks are witnessing a rising number of physical branch closures.
The shift to online options is highlighting the potential of decentralized finance (DeFi) and the blockchain network Ethereum, which can perform functions similar to banking but without a staff of employees.
Instead, the network uses self-enforcing smart contracts.
While not all banks have accelerated the closure of branches, the Wall Street Journal reports that the industry lost a total of 9,000 branches over the past decade, with bank branch closures reaching another record high in 2018.
Data compiled by Statista shows that in 2018, there were a total of 77,647 branches of FDIC-insured commercial banks in the US, down from a high of 82,532 recorded in 2009.
According to S&P Global Market Intelligence, the wave of closures is persistent and is not likely to change.
Says James Barth, a finance professor at Auburn University,
“Banks are deciding you don’t need as many branches. You need them in strategic locations where you can have the biggest bang for your buck.”
That’s leaving rural consumers out in the cold, stripping them of access to financial services and creating a problem that cryptocurrencies and DeFi are intended to solve.
Instead of experimenting with the notion of generating new retail business by putting banks inside of grocery stores, cryptocurrencies are putting banks inside of smart phones.
As physical branches face increasing competition from mobile applications and digital platforms, rural segments of the population are bearing the brunt.
Key findings from Perspectives from Main Street: Bank Branch Access in Rural Communities, a Federal Reserve Board report, reveal the most disadvantaged.
“These deeply affected rural counties tend to be poorer, composed of residents with fewer years of education, and have a greater proportion of African American residents relative to other rural counties.”
While DeFi hopes to hit a home run by promoting clear use cases for digital assets through platforms that can give anyone, anywhere, full control of their assets, provide loans and offer highly competitive interest-bearing contracts, it requires a seismic shift in banking habits and increasing personal trust in computer screens. It will also take big incentives to entice users who have plenty of banking options. As for areas where financial services are vanishing, new decentralized options are promising benefits.
The Ethereum-based stablecoin Dai is an example of how DeFi is positioned to challenge traditional methods of storing value. The Dai Savings Rate (DSR) is billed as a “savings account for your crypto.” The feature allows people to earn savings by holding Dai in a special smart contract. Without a bank or a local branch or any intermediary, Dai holders can deposit Dai into the DSR contract to earn additional Dai. Holders can then withdraw the asset from the contract, along with the savings earned up to that point.
The contract is designed to deliver a variable savings rate. The following example shows a rate of 5% per year. A Dai holder deposits 100 Dai and then withdraws 105 Dai after 12 months.
As new platforms aim to disintermediate traditional financial institutions, they come with the risks associated with new technologies – and the venture capitalists who are willing to bet on them. Compound, a DeFi system that generates returns for users, is backed by Andreessen Horowitz, a big Silicon Valley player with $2.7 billion under management.
Compound, which brings crypto lenders and crypto borrowers together, has over $85.5 million in crypto locked in its system. According to data tracker DeFi Pulse, a total of $674.3 million, spread across several leading platforms that are built primarily on Ethereum, is currently locked in DeFi. Industry leaders expect that number to take off in 2020.
Writes Mason Nystrom of Ethereum incubator ConsenSys,
“The interoperable, programmable, and composable nature of the open financial stack built on Ethereum provides the foundation for a new financial economy…
While 2019 saw significant strides forward in the development of decentralized finance, 2020 looks set to make a leap.”
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