Next-Gen Personal Finance: The Signs and Signals

By Kay Khemani, Managing Director of

An industry still discovering itself

As global markets respond to the disruptive potential of decentralized finance (DeFi), one thing can be said for certain: amateur and do-it-yourself (DIY) traders are here to stay. In the face of new innovations, regulations and players, the crypto finance industry is undergoing an upheaval as it attempts to unearth its truest form.

Given the rise of platforms like Robinhood and observing the total value locked in decentralized finance, there is a clear trend towards disintermediation emerging. Recent occurrences have seen amateur traders attempt to out-do experts, even finding marginal success with the likes of Goldman Sachs and Morgan Stanley using DIY traders to identify lucrative opportunities.

Similarly, the DeFi industry also looks set to play its part in ushering the next iteration of the finance industry with nearly $70B worth of locked protocols. Platforms such as UniSwap and SushiSwap have surged in popularity allowing for increased trading diversity, lower fees, trustless transactions and privacy. However, as promising as this technology is, it is poorly regulated, leading to scams (such as pump and dump schemes) that expose consumers to greater risk.

“Regulation chases innovation”

DeFi has had a positive influence with regard to the democratization of financial services, previously only available to the initiated. Now, anyone with a phone and a bank account can actively trade assets, albeit in an unregulated fashion. For this reason, it’s difficult to see DeFi realizing its full disruptive potential of retroactively configuring centralized finance (CeFi).

The prevalence of scams and hacks, such as the Pancake Bunny protocol hack back in May 2021, also serves only to erode public trust and feed further into skepticism of the tech. The billions of dollars worth of capital that flow through DeFi platforms every day, while impressive, remain wholly unregulated with respect to Know Your Customer (KYC) requirements.

Many regulators have already opened investigations into several DeFi platforms, such as the SEC’s probe into the startup behind Uniswap, its ongoing lawsuit with Ripple Labs Inc and most recently, its Wells Notice issued to Coinbase. Similarly in the UK, the Financial Conduct Authority (FCA) ordered crypto-exchange Binance to cease all regulated activities.

Going forward, we can expect to see more incumbent players contributing to a hybridized financial framework, furnishing users with the autonomy of DeFi and the credibility of CeFi. This model could maintain public trust, by ensuring individual sovereignty and privacy, while also responding to a rapidly evolving market.

“A fool and his money are soon parted”

While the democratization of finance is certainly a commendable endeavor, moving towards greater global financial inclusion, realistically the tools available to amateur traders are not capable of matching those of legacy financial systems. Retail trading or investing is ultimately subject to slower, cheaper and less effective market analysis tools and people are generally less knowledgeable about what drives company valuations.

Nevertheless, the widespread availability of financial advice on social platforms, particularly TikTok, Instagram and Reddit, has instilled a wave of confidence in amateur traders. For better or worse, this confidence has propelled events like the recent GameStop saga, in which a decentralized online community conspired to get one back against their financial oppressors. However, this belief that retail investors can dictate market movements is unfounded.

Amateur traders may very well produce short term gains, and small victories are important, but while anarchistic sentiment is attractive, not all actors are benevolent. There is an enormous possibility that the financially illiterate could be taken advantage of, as is a concern surrounding social tokens and dedicated fans. To prevent this from happening at scale, it is essential that appropriate KYC measures and anti-money laundering (AML) regulations are not overlooked.

The current market is rife with hard lessons to learn, and as more former bankers and equity researchers transition into the DeFi movement, you can expect to see amateur trading prowess graduate from ‘broscience’-style financial practices towards more sophisticated methods. Additionally, more refined user experiences and high quality educational resources and services will contribute significantly to leading the less financially versed.

Shaping the future of finance

Crypto has been likened to ‘Wild West,’ functioning without any formal regulation. Certain countries such as Switzerland, Germany and Singapore have blazed a path through the industry with favorable regulations, while states within the USA, Europe and Asia remain reliant on guidance from the Financial Action Task Force (FATF), the global money-laundering authority.

Similarly, regulators could end up fleshing out better guidelines and laws by consulting with legitimate crypto-focused projects as was the case with the recent Token Safe Harbor proposal put forward by the SEC which was drafted by incorporating constructive feedback from the crypto community.

With increasing scrutiny surrounding the finance space, it seems likely that companies and individuals will be forced to learn hard lessons, adopting new practices in order to secure the longevity required to live on within the industry and only time will reveal whether the aforementioned trends will end up manifesting themselves either to the detriment or benefit of the sector.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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