All throughout last year, the world of decentralized finance (DeFi) continued its growth until it reached a total locked value (TVL) of about $15,000 million in December. This growth was a vertiginous one if we take into account the fact that the TVL was only $1 billion at the beginning of the year.
In fact, for a few months, trading volumes on certain DeFi exchanges exceeded those of some large traditional exchanges. Looking ahead, it is likely that they will continue to grow in 2021, despite facing a setback this week. Elon Musk announced that Tesla was abandoning payments via bitcoin (BTC).
BTC and other digital currencies had followed an upward trajectory in recent months, as buyers have found new uses for these assets. This has resulted in a wave of new market trends gripping the financial world during the pandemic. But the continuous fluctuations in the value of cryptocurrencies have also grabbed many headlines of late.
The rise in currency prices to highs at the end of 2020 has already raised many questions about investor protection and necessary regulations regarding the same. For instance, the GameStop affair has raised alarm bells about the importance of some changes in the operation of the DeFi sector.
The tension between ruling elites and civil society is one of the bases of cryptocurrencies, which were born from a desire for decentralization. So, its existence in a regulated framework presents some challenges.
“The basic and general question is that the innovation of digital assets has exceeded our regulatory framework,” explained Timothy Massad, a researcher from Harvard the former chairman of the Commodity Futures Trading Commission, in an article in the New York Times. “That is not unusual; there has always been a tension between innovation and regulation.”
One of the biggest debates among crypto-regulators gravitates around whether cryptocurrencies are commodities or securities, as well as the potential limitations of crypto-retail for certain markets.
Cryptocurrencies have become one of the most popular channels for expatriate workers to send payments to their families in their home countries without having to deal with costs and penalties. Companies like Ripple have bet heavily on this market.
However, due to its dispute with the United States Securities and Exchange Commission (SEC), Ripple has lost out on important partners such as MoneyGram, one of the most important payment platforms for migrants.
But, since the dispute with the SEC, 100% of the clients of its currency (known as XRP) are located outside USA, mainly in southeast Asia. This is because regulators in Singapore and Thailand have classified XRP as a digital asset.
In addition to this, the sector is also booming in the Middle East, North Africa, Saudi Arabia and India.
The CEO of Ripple, Brad Garlinghouse, recently declared that non-fungible tokens (TNF) have more of a future than some people are predicting. Garlinghouse pointed out many possibilities for its use, especially when it comes to digital collectibles.
“When it comes to art, collectibles, music, etc… there are many very convincing arguments in favor of using this technology,” he said. The growth of transactions of this type increases the volume and diversifies the potential of cryptocurrencies.
It also opens them up to a new audience. XRP is already working to ensure that its platform will be able to support TNF.
China, Cambodia and the Bahamas are some countries that have already launched digital currencies through their central banks in the recent past. In USA, the Federal Reserve is currently working with MIT to explore the viability of a digital currency.
Some experts believe that the adoption of digital currencies by the world’s governments will help stimulate more efficient cross-border transactions. This should be read with a pinch of salt because a significant portion of users still prefer independent currencies.
Throughout 2020, large institutions such as JP Morgan and Standard Chartered were building DeFi solutions for their clients. Some institutions like Citibank to Deutsche Bank have even begun to regularly cover a part of their investments in cryptocurrencies.
This trend will only accelerate in 2021 as many banks begin to go public with specific cryptocurrency development plans. This is likely to further catalyze the entry of traditional companies from the demand side.
Although investment banks have been the most active players so far, experts suggest that in the future, we must be vigilant with private banks.