In recent years, Decentralised Finance (DeFi) has been a hot topic in the financial world. It refers to all financial services that can be found on the Blockchain, including loans, yield generation opportunities, insurance, asset and derivative exchanges, and more. The major difference between DeFi and traditional banking services lies in the fact that DeFi avoids human intermediaries, making it not only faster and cost efficient in executing tasks, but it also allows for self-control of one’s assets.
For a long time, institutional financial players were hesitant to embrace the rise of DeFi, preferring not to get involved in an Ecosystem rich of opportunities but not regulated. Banks, wealth managers, and hedge funds face regulatory obligations that remain a significant barrier to entry into this world of opportunities. Due to the inability to ensure the identity of the stakeholders and the source of funds, institutional finance simply could not afford to enter the DeFi Ecosystem.
However, with the emergence of robust technological solutions for customer identification (KYC) and anti-money laundering (AML), DeFi has gained the maturity it lacked to fully embrace institutional players. These technological solutions now exist to access a DeFi that complies with the regulatory standards of traditional finance. It is possible to ensure the identity of new entrants in the Ecosystem, trace funds, track all transactions to ensure counterparty compliance, and prevent access to fraudulent origin wallets, such as those resulting from hacking or coming from blacklisted countries. To ensure the highest level of control, it is even possible to aggregate the results of different technological solutions that perform these verifications. Once validated, the entity can then freely take advantage of investment opportunities offered in the Ecosystem.
The DeFi market was already valued at over $13bn in 2022, and experts forecast an average annual growth rate of over 40%, which could take this market to nearly $200bn by 2030. This development represents an opportunity that institutional actors cannot afford to ignore, as they must be able to respond to the growing interest and demand of their clients for this source of diversification.
In addition to regulatory compliance, Shariah compliance in DeFi is a highly promising avenue for market adoption. This is especially significant because it can bring a huge market of investors into the DeFi space. Islamic finance principles forbid charging or paying interest and instead rely on risk-sharing and avoiding speculative investments. This aligns well with DeFi’s Decentralised, transparent nature and creates investment opportunities for Shariah compliant investors.
In conclusion, as DeFi continues to mature and gain regulatory compliance, institutional players are increasingly recognising the potential of this market. The exponential growth of the DeFi market, along with the potential of Shariah-compliant DeFi products, presents a great opportunity for institutional players as they strive to meet the demands of their clients and embrace the future of finance.