The recent development of Bitcoin and other cryptocurrencies in a little over a decade has changed the definition of money and spawned a parallel universe of alternative financial services, allowing crypto business to move into traditional banking territory.
Alternative services offered by crypto business :
Mostly lending and borrowing.
Investors can earn interest on their holdings of digital currencies, often a lot more than they could on cash deposits in bank.
Investor can utilize crypto as collateral to back a loan.
Crypto loans generally involve no credit checks as transactions are backed by digital assests. Eg. Deposits are not guaranteed by the federal Deposit Insurance corporation.
promote financial inclusion
usually high yield for consumers.
provide financial stability for customers in countries with volatile government-issued currencies.
Why-such high yields?
Crypto outfits pool deposits to offer loans and give interest to depositors, just as traditional banks.
But by law, banks are required to have minimum reserves as a safety backup.
Other risks like cyber attacks, extreme market conditions and other operational or technical difficulties that could lead to a temporary or permanent halt on withdrawals or transfers.
Decentralized finance or DeFi, loosely describes an alternative finance ecosystem where consumer transfer, trade, borrow and lend cryptocurrency.
The DeFi movement aims to 'disintermediate' finance, using computer code to eliminate the need for trust and middlemen from transactions.
DeFi platforms are structured to become independent from their developers and bankers overtime and to ultimately be governed by a community of users.
Stable coins are cryptocurrencies linked to stable assests, commonly the dollar.
While crypto is very volatile, making it less practical for transactions like payments or loans.
Stablecoin issuers are supposed to hold and monitor reserves as government institutions do.
But there is no guarantee, they actually hold the one to one dollar backing them claim.
New technology demands a new approach, saying novel risks can be addressed by without necessarily crimping innovations.
Eg. instead of mandating that DeFi protocols maintain the reserves of a bank and collect customer information, officials might create new kinds of requirement like code audits and risk parameters.
Questions of identity which are crucial to fighting fraud, could be addressed by flipping the old script etc.
Law enforcers could take the broad view.
Use of Artificial Intelligence and data analysis to monitor suspicious activity.