What is DeFinity and why was it created?
DeFinity is a decentralised exchange solution for fiat Foreign Exchange, tokenised currencies, and central bank digital currencies (CBDC). Over the course of the last year, it became obvious to us that there was a concerted push from some of the largest central banks towards CBDC. From the developed nations especially, the aim is to create a merger between behavioural economics and monetary and fiscal policy. We do not believe that the traditional financial markets will be replaced by digital ones, but that there will be a merger of the two and in order to effect that merger you need a bridge, which is what DeFinity is.
What are Central Bank Digital Currencies?
In their simplest form, Central Bank Digital Currencies are essentially an electronic version of fiat money issued by a central authority. That, however, is an oversimplification because there is a further subdivision between retail and wholesale use cases and, beyond that, 85 of the largest central banks are pursuing more than a dozen iterations, from purely token based to direct account based to intermediated account based CBDC. As of yet, it is not clear which combination of these is going to succeed.
Why are CBDCs they such a big deal?
The pandemic of 2020 has broadly accelerated the move towards CBDC, but the driving forces behind the original move in the EM economies differs materially from those of the developed world. The principal rational for EM economies embracing CBDCs is financial inclusion, which is a huge deal. Secondly, given that two-thirds of all central banks are not members of the Bank for International Settlements (BIS), efficiencies in payments are the other main drivers. In the developed world, payment efficiencies are sought, but perhaps the greater driver here is better control of fiscal and monetary policy.
What are the benefits and risks of CBDC?
There are many benefits of CBDC such as financial inclusion, faster payments, reduced costs, more control over monetary and fiscal policy and financial innovation such as programmability. Perhaps the greatest risk of CBDC is a disintermediation of commercial banks. The other risks are around privacy.
Does the DeFinity project address issues of inequality concerned by Central Banks?
The greatest contributor to inequality in any society is lack of financial inclusion. It is only with financial inclusion that stable prices and sustainable activity in the economy can create balance and allow the most disadvantaged of society to flourish. CBDC will permit the merger of monetary and fiscal policies on an individual basis, meaning much finer control over economy. One of the consequences of this is that CBDC can also act as a vehicle to improve tax receipts of nations where traditional participation in taxation is low. This in turn can benefit under-developed nations with their infrastructure and their educational and medical needs. The DeFinity offering is complimentary to current central bank efforts, to infuse behavioural economics with monetary and fiscal policy, for a more inclusive global financial system and help each person and each business transact faster, more cheaply, and with full transparency.
Why is real-time settlement at the forefront of most market participants?
Today’s market mostly relies on outdated settlement systems powered by legacy technology and complex legal structure. The risk of counterparty default is applicable to any trading relationship. Today’s settlement systems are costly as they tie up collateral, which cannot be used otherwise. The DeFinity solution aims to enable any buyer or seller of currency to benefit from near-instant settlement using our innovative approach to asset allocation coupled with our proprietary technology.