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Widad Abu Chakra

Do banking crises open the way for decentralized finance?


Financial services and financing tools are witnessing radical transformations in light of the momentum of the accelerating pace of financial crises, the increase in interest rates and the rise in inflation rates, which raises the question about the possibility that the crisis will be in the interest of decentralized finance after the financial crisis in 2008 produced results, including the emergence of “Bitcoin” as a digital currency. Within a basket of cryptocurrencies, it was then promoted as a basic hedge against inflation.

In the aftermath of the banking sector crisis this year, some investors once again saw cryptocurrencies as a safe have for saving and investing, despite what this sector witnessed from a stormy winter and varying fluctuations that undermined confidence in it.

Cryptocurrencies undoubtedly raise widespread controversy, but there is almost agreement that they are a cornerstone for the development of financial services and financing using technologies such as Blockchain and Web 3.

So, investors — especially venture capital funds, the main supporter of cryptocurrencies — stand in light of the financial challenges and lack of liquidity at a major crossroads to find investment alternatives and financial tools with new business models.

Some believe that these new technologies will change traditional financing systems and tools, leaving room for a new “decentralized” financial system controlled by the individual user only.

Web 3: democracy and inclusiveness

The third generation of Internet technology, which relies heavily on machine learning, artificial intelligence, the Internet of Things and Blockchain technologies, is the future of finance and financial services.

“Decentralized” finance uses smart contracts based on “Blockchain” to conduct transactions without the need to rely on central service providers, such as custodians, central clearing houses or escrow agents, which provides users with a wider margin of control over their data on the Internet and reduces Risks and potential for error.

These decentralized finance protocols are built in a way that prevents interference and fraud, as each participant can see the rules before participating and verify that transactions are executed in a transparent manner.

Lending markets, exchange protocols, financial derivatives, and asset management protocols are just examples of the opportunities and capabilities that Web 3 may offer.

International and Arab steps

The percentage of central banks that will issue digital currencies has reached nearly 90 percent, and the Gulf countries are moving in the same direction.

This approach remains just a step in the journey of a thousand miles, as these currencies will remain at the central level, and need legislation and practices to become financing tools in the decentralized Internet world.

Germany recently issued the “Future Finance Law” as a step towards modernizing its financial markets, in a proactive step to digitize financial markets through the issuance of electronic bonds, the development of cryptocurrency wallets, and the issuance of cryptocurrency bonds.

Last year, the Dubai Securities Authority in the Dubai Financial Center issued special regulations for codes and encrypted financial derivatives, but these regulations and legislation are limited to the “offshore” external scope.

Bahrain is unique among the Arab countries in regulating these tools on the internal scale of the state, as the Central Bank of Bahrain announced its regulation of encrypted financial bonds.

Bahrain is also the only Arab country that has granted full licenses to cryptocurrency exchange companies.

The volume of decentralized finance, according to ChainAnalysis, increased tenfold between 2020 and 2021 to reach $6 trillion, more than half of all trades on the blockchain.

Despite the successive crisis that befell the “cryptocurrency” sector, the value of decentralized finance exchanges in 2022 reached $3.7 trillion.

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