Commercial banks are drawn to the DeFi industry? Siam makes a bet with a $110 million fund.

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Thailand’s oldest bank believes blockchain and DeFi are the future of global finance and plans to invest in the emerging digital landscape.

While serious institutional interest in cryptocurrency may be becoming more of an established trend than a new narrative, the focus of big-money players is typically on Bitcoin (BTC). However, assets such as Ether (ETH) and decentralised finance (DeFi) are catching the attention of major investors.

DeFi is a major focus point of Siam Commercial Bank’s (SCB) current digital asset drive, as Thailand’s oldest bank prepares for the expected financial technological disruption of decentralised finance. While other banks remain undecided or are only making limited forays into interacting with digital assets, SCB says it is eager to commit funds to research blockchain and DeFi.

SCB’s DeFi focus comes at a time when Thai regulators are targeting the decentralised finance space for stricter regulations. Indeed, national and intergovernmental regulatory agencies are increasingly paying attention to the niche market space looking to craft legal policies for the DeFi market.

DeFi initially held the promise of decentralisation; the disintermediation of global finance’s established gatekeepers. However, as banks and financial institutions invest in decentralised technology, the narrative appears to be shifting towards a hybrid form of DeFi known as regulated DeFi, which combines the existing norms and efficiency of traditional finance with the instant settlements and cost-cutting benefits associated with decentralised protocols.

DeFi ambitions

Siam Commercial Bank’s $110 million blockchain war chest began with a $50 million seed fund launched by SCB 10X, the bank’s venture arm, in February. As Cointelegraph reported at the time, the fund bolstered the bank’s forward-thinking approach to emerging developments in digital finance.

Mukaya ‘Tai’ Panich, chief venture and investment officer at SCB 10X, told Cointelegraph that DeFi was a sort of revelation for the bank during its assessment of the emerging digital finance landscape.

“We were doing work on the blockchain industry and started looking into DeFi. And we were amazed by it,” Panich said. According to the SCB 10X executive, the bank was quick to spot the paradigm shift of potential DeFi technology and the possible disintermediation of the traditional financial institutions.

“DeFi projects can be completely automated,” he said, noting that human involvement would be restricted to smart contract code upgrades. Panich also touched on the revolutionary nature of smart contracts and how lines of code can enable direct transactions between entities like lenders and borrowers without the need for a central counterparty.

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Given the possibility of DeFi upending the legacy finance status quo, Panich says banks would do well to prepare for the imminent disruption:

“The reason we want to invest in DeFi and be part of the DeFi protocol’s ecosystem is because we want to understand and capitalize on DeFi, given its potential to meaningfully impact the financial industry.”

The blockchain and DeFi fund, at $110 million, is nearly half the size of the SCB 10X’s $220 million venture capital fund. Panich commented on the size of the allocation to digital assets, saying that it reflected the bank’s commitment to the DeFi space, adding:

“SCB 10X has invested and developed multiple collaborative relationships with the blockchain community in Asia and across the world including Ripple, BlockFi, Sygnum, Alpha Finance Lab, Anchorage, Anchor Protocol (part of Terra chain), Axelar and Ape Board, among others.”

Upending global finance

In April, John Whelan, the head of Banco Santander’s blockchain lab in Madrid, made the case for regulated DeFi. Private layer-two settlement networks for asset classes running on top of public blockchains, according to Whelan, will most likely emerge in the future.

Blockchain adoption for reducing transaction settlement throughput, according to Whelan, is a major focus point for legacy finance stakeholders. Whelan’s comments emphasised the emerging narrative that, rather than disintermediation, financial institutions will find ways to incorporate DeFi technology into their own backend processes.

Panich also echoed similar sentiments, telling Cointelegraph: “I want to point out that I really see a future where traditional financial companies will work together with DeFi companies. My view is that in the future, there will be an integration of traditional finance with DeFi.”

According to the SCB 10X chief investment officer, banks and financial institutions have the necessary “customer-facing” experience to better offer innovative fintech services to consumers. “In the future, I can see a world where DeFi can power the back-end of traditional finance companies,” Panich added.

According to Rachid Ajaja, CEO and co-founder of decentralised capital market outfit AllianceBlock, the promised upending of legacy finance by DeFi will occur in the long run. However, Ajaja believes that in the short term, more financial institutions will leverage aspects of decentralised finance.

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The CEO of AllianceBlock drew parallels with the digital transformation era, which saw the emergence of fintech companies offering services via APIs that interface with the banking system. “We will see exactly the same thing with the bridging of DeFi and financial institutions, and bit by bit, legacy systems will change,” Ajaja told Cointelegraph, adding:

“Long term, I am absolutely confident that DeFi will upend the global financial system completely because everything that is done in traditional finance can be replicated in DeFi with lower cost, less need for a middleman, new opportunities and increased new revenue streams. It’s only a matter of time.”

Craig Russo, director of innovation at PolyientX, a nonfungible token vault and marketplace protocol, provided additional insight into the potential future path for DeFi adoption in global finance. According to Russo, financial institutions will most likely adopt open-access protocols through initiatives such as Compound Treasury while also incorporating DeFi technology into their internal systems.

“A big goal of the DeFi movement is to revamp the current economic system to better align incentive structures, which may ultimately come at odds with the interests of some institutions while opening the door to a new wave of fintech innovation,” Russo added.

Dealing with regulatory pressure

The Thai SEC’s intention to consider DeFi regulations reflects the current focus on DeFi by regulators around the world. In addition, the World Economic Forum published a policy toolkit for fair and efficient DeFi regulations in June.

The emphasis on fair and efficient regulations is most likely motivated by concerns that more stringent DeFi regulations will put blockchain startups at a competitive disadvantage in terms of compliance. Banks and financial institutions, for example, may find it easier to negotiate these policy constraints.

“Blockchain and DeFi are very young, emerging and fast-changing industries. As a TradFi player active in DeFi, it is incumbent upon us to work closely with the government and regulators to help put forward the DeFi industry’s perspective, finding optimal ways to move the industry rapidly forward.”

The Thai SEC’s intention to consider DeFi regulations reflects the current focus on DeFi by regulators around the world. In addition, the World Economic Forum published a policy toolkit for fair and efficient DeFi regulations in June.

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The emphasis on fair and efficient regulations is most likely motivated by concerns that more stringent DeFi regulations will put blockchain startups at a competitive disadvantage in terms of compliance. Banks and financial institutions, for example, may find it easier to negotiate these policy constraints.

Indeed, AllianceBlock’s Ajaja told Cointelegraph, “DeFi primitives are definitely at a disadvantage in this regard compared to their counterparts in mainstream finance.” As a result, Ajaja stated that compliance gateways for protocols such as Know Your Customer and Anti-Money Laundering are required for greater compatibility with mainstream finance and the transition to interfacing with real-world assets for DeFi primitives.

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