In the financial landscape, both liquid staking tokens and government bonds in traditional finance bear the similarity in that they serve as investment vehicles that offer a form of yield or interest over time. In the case of liquid staking tokens, users earn staking rewards, while government bonds offer periodic interest payments. Furthermore, both liquid staking tokens and certain types of government bonds can be readily traded in secondary markets, providing liquidity to investors.
For greater crypto adoption to occur, we need traditional finance (TradFi) and decentralized finance (DeFi) to join forces in symbiotic harmony and usher in together a new era of financial evolution. This convergence holds the key to unlocking mass adoption, but it will require more time and greater collaboration.
Against the backdrop of current U.S. hostility toward crypto, a glimmer of optimism has emerged. PayPal has made history by becoming the first major U.S.-based payment service provider to introduce a stablecoin called PayPal USD (PYUSD), which is pegged to the U.S. dollar. The involvement of a major global payment service marks a pivotal moment for the cryptocurrency industry as it instills a newfound level of trust into the often turbulent crypto landscape.
However, it is crucial to exercise caution and acknowledge that the full impact of PayPal’s entry into the crypto sphere will only be realized when several key components fall into place.
In its current form, PYUSD can only be used in PayPal’s own ecosystem, thereby limiting its strength as a stablecoin. For PYUSD to be a well-rounded product, it must be transient between Web2 and Web3 and operate across multiple blockchains. In order to achieve this, PYUSD also needs to be listed on centrally backed exchanges and decentralized exchanges. Doing so will inject PYUSD with the liquidity required for it to support use cases across centralized exchanges, decentralized exchanges, DeFi protocols, and blockchains, thereby unlocking its true potential.
Therefore, while PayPal’s Web3 venture is certainly noteworthy, it represents just a small victory in the grander battle of legitimizing cryptocurrency as a globally recognized and regulated industry. It is another case of isolated progress that spotlights the many bridges that need casting between TradFi and DeFi before the convergence can be complete.
Bringing together TradFi and DeFi
Bridging the gap between TradFi and DeFi will take time and collaboration, utilizing the various strengths that each sector possesses.
TradFi institutions offer more robust risk management strategies than DeFi protocols, and inherently offer a heightened environment of security and credibility, thereby making them attractive options for individuals who remain cautious about embracing digital assets. DeFi’s innovation offers users more transparency and autonomy and can reach audiences who have historically been excluded from financial systems.
As traditional financial companies delve into the crypto world, the difficulty in striking a balance between stability sought by traditional users, and innovation and autonomy of the crypto market is still a major pain point for the crypto ecosystem.
This is where PayPal’s legacy of innovation and steadiness comes into play. PYUSD provides a safer entry point for non-native crypto investors and benefits from PayPal’s reputation for stability, security and regulatory compliance. However, its heavily centralized nature comes with its own roadblocks. The unbanked still cannot access PYUSD or Web3 as PayPal requires users to have a bank account. Additionally, even if PayPal offers this service beyond America, we have to question how effective it will be considering that the developing world does not widely utilize this service.
PYUSD could therefore still benefit from the autonomy of DeFi, while DeFi can also greatly benefit from the existing network of PYUSD. If we can build a complementary relationship between Web2 and Web3, and TradFi and DeFi, that encapsulates credibility, innovation, and accessibility, we hold the potential to supercharge the global economy and push institutional adoption of digital assets.
Traversing from Web2 to Web3
Paypal’s stablecoin launch is one of many noteworthy, yet isolated, developments involving financial companies in 2023. Recently many leaders of the financial world have announced their increasing interest in the crypto industry. Jacobi, for example, was the first to have their spot Bitcoin exchange-traded fund listed in Europe. Visa has been actively testing payment of gas fees in fiat currency with a credit or debit card. Additionally, even institutional participation in liquid staking has increased three-fold since the Shanghai Upgrade.
While these developments help to shift the reputation of crypto assets from merely risky endeavors to credible investment options, they remain siloed developments as they have yet to facilitate a seamless transition between Web2 and Web3. For example, PYUSD can only be accessed by PayPal’s U.S. customer base through Venmo, thus it only provides banked Americans with yet another way to transact using some digital representation of the U.S. dollar.
Why TradFi and DeFi shouldn’t be silos
A major obstacle to mass crypto adoption is that cryptocurrencies can be intimidating for the average individual, laden with complex technical jargon and intricacies. This is where traditional financial institutions and Web2 technology could play a crucial role by simplifying the information and making it more accessible to a broader audience.
However, relying on the traditional finance sector to work in isolation from the DeFi ecosystem to onboard new users has high risks. The potential of traditional finance is limited from reaching all demographics, especially the underbanked, as profit motives can lead to neglecting marginalized communities. Here, the synergy of TradFi and DeFi becomes vital. DeFi offers transparency, autonomy and accessibility against the often opaque and exclusive nature of TradFi.
What it will take for convergence to happen
The convergence currently sits as multiple lines in the sand slowly moving toward each other. Merging these lines will be the key to crypto’s mass adoption, but getting there will take time and collaboration.
Certain factors are required for mass adoption. Continued momentum within the crypto ecosystem is evident, marked by continuous innovation and regulatory advancements. Notably, several countries, including Singapore, Hong Kong and France, have demonstrated commendable commitment to refining regulatory frameworks, thereby creating a more conducive environment for growth.
We have seen progress in the evolving landscape of central bank digital currencies. This trajectory has facilitated collaborations between blockchain entities and central banks, resulting in the exploration of streamlined trade settlements across economies like the use of the digital yuan for direct trade settlements.
In addition, as demonstrated by successful real estate trials in Hong Kong and JPMorgan executing the first DeFi transaction for Singapore’s central bank, the tokenization of tangible assets has the potential to transform market dynamics. Tokenization trends have prominently emerged in Asia, with proactive regulatory frameworks being established in jurisdictions such as Thailand, Hong Kong, Singapore and Japan to foster the expansion and embrace of tokenization.
Nonetheless, more is needed for comprehensive development, and macro conditions play a crucial role in facilitating the market turnaround. For instance, current high interest rates deter institutional investment into crypto as it offers investors lower returns than through bonds. When inflation lowers to more reasonable levels and governments move to decrease interest rates, we would then start to see greater institutional participation in crypto.
The undercurrent of skepticism about blockchain from mainstream audiences also cannot be ignored. While mainstream forays have made progressive strides, their impact remains localized.
DeFi and TradFi have their own advantages, and when fused together, we could see a new chapter of the global economy.
Taking a page out of the political book could put DAOs, or decentralized autonomous organizations, on the path to achieving the sweet spot between efficiency and decentralization. In particular, DAOs can learn from the way in which political parties elect representatives, run campaigns and meet long-term goals all while sustaining continuous support from a community that is not always aligned.
This may sound counterintuitive, given that DAOs are supposed to be new ways of building organizations. And why would anyone want to take a page out of political operations, known for being dysfunctional?
While DAOs offer significant advantages over traditional organizations, most DAOs are still trying to overcome the same fundamental roadblocks: achieving efficiency and consensus within the community. These issues are often a result of poor governance structures and poor communication.
Danny Chong is the co-founder of Tranchess, a decentralized yield-enhancing asset tracker.
In particular, most token holders can typically draft proposals today. This may enable something like direct democracy (or what some may even consider “decentralized” governance), but it lends itself to inefficiency. When anyone can propose anything, long-term goals become too diffused.
Additionally, DAOs have had long-standing communication problems. Poor communication often causes backlash, delays important roadmap checkpoints from being decided or executed and reveals a lack of genuine consensus within the community.
These issues are clearly issues with the community rather than the code that comprises a DAO. Which is why they might be addressed by looking at some key practices of political parties.
Lack of expertise and foresight
As mentioned, allowing all token holders to make proposals diffuses the organization’s objectives and often creates a conflict between the short-term interests of the token holder and the long-term goals of the project itself. This problem comes in all shapes and sizes.
Firstly, this can result in too many proposals. When proposals come flooding in, many of which are low-quality or are written by someone with their head in the clouds, it can make it difficult for the DAO to prioritize what’s important and make decisions in a timely manner. This can be made worse by poor filtration systems meaning that many proposals will be overlooked or missed altogether.
Another problem is that many token holders lack expertise. Not all token holders have the same level of knowledge in the areas that are relevant to the DAO. Therefore proposals are often neither well-thought-out nor in the best interests of the DAO.
Lastly, a lower turnout in voting by token holders can allow proposals to be pushed through by relatively small groups leading to decisions that are not properly aligned with the majority view of the DAO and its roadmap.
Formalizing goals and plans
Political parties elect representatives who draft laws for constituencies. They are elected by the people, and can be removed from office should they cease to represent the will of the people. This creates a context for policies to be made in the electorate’s best interests.
DAOs should work in a similar way, whereby the community votes for individuals who are responsible for creating proposals that guide the projects’ future. Elected individuals would have a strong track record contributing to the DAO, and should demonstrably be aligned with the project’s goals.
And should protocol politicians become unaligned, the community can vote for someone else. This kind of structure would also limit or disincentive bad actors from taking control and causing mischief. It may even limit the number of people who rage quit from DAOs.
Campaign for DAO policies
Had there been more transparency and more of a “campaign” in the run-up to Arbitrum’s vote, it is possible that there would not have been as much outrage from the community.
Political parties and candidates campaign extensively for proposed policies ahead of elections. Campaigns help inform voters about the candidates’ positions on the issues and their plans for the future. DAOs need to undergo a similar period so that the community is fully informed about the proposals they will eventually vote on.
Thorough research is likely needed to understand the concerns and aspirations of constituents — in DAOs and the great public. And so political parties may take into account demographics, preferences and which policies are higher in priority to inform decision-making.
While this cannot be blanket applied because of the product development-focused nature of crypto, a better understanding of who is being communicated to and their concerns could shape how well proposals resonate with the target audience.
Message framing is also done carefully by using compelling narratives and case studies to make policies relatable and impactful. Rather than only focusing on the practical aspects of a proposal, DAOs can better contextualize their plans by connecting them to stories and tangible examples that resonate with people.
Finally, political parties privilege grassroots engagement. There is immense value in the organizing and mobilization of efforts at the ground level. Local networks of volunteers and key community leaders are empowered to speak to their circles of influence, either directly or through door-to-door canvassing, town hall meetings and local events.
For DAOs interested in grassroots mobilization, this can be done through AMAs [ask me anythings] with community managers and a rotating system of community managers.
The dark side to politics
By no means should DAOs try to operate in exactly the same way as political parties. Namely, electing people to positions of power and limiting who can set policies has the potential to corrupt even the most community minded.
To mitigate centralization, leadership roles will constantly need to be assessed and term limits imposed. Like in democracies, after a certain period, DAO members should vote for other representatives to ensure decentralization and diverse ideas.
Another issue with political parties is that constituents can be persuaded by personal bias, favoritism and potentially misleading personalities. Therefore, electing DAO leaders should not become personality contests. Focusing instead on a person’s policies will ensure decisions would be in the best interests of the DAO as a whole.
Beyond that, DAOs have in many ways already proven to be more effective than political parties. For example, DAO decisions are recorded on public blockchains, meaning that anyone can see how the ship is being steered. while political parties often operate in secrecy.
DAOs are also by nature decentralized and so are location-agnostic. In a world that increasingly requires international coordination, this allows people across the globe to join. That means organizations can attract the best of the best, and can more truly represent diverse viewpoints.
And finally, DAOs can be more agile than traditional organizations that are often hampered by long, bureaucratic processes.
Singapore’s intention to become a global crypto hub will see greater realization this year by developing as a particular kind of hub: one geared toward institutional and industry participation. Inherent in this strategy is the intentional facilitation of certain aspects of growth, alongside the limitation of other facets. Singapore seeks to leverage accredited investors and institutions that have sufficient assets and expertise to participate in this high-risk environment, especially in early development stages. While this may mean hampered retail participation, this approach provides much-needed clarity for businesses from the perspective of policy that is still relatively rare in the rest of the world.
As a reputable financial center on the global map, Singapore’s efforts remain steadfast in maintaining its lead in the space. Through intentional policy and regulatory efforts made in 2022 and prior to lay the foundations for this year, Singapore’s approach to crypto may serve as a blueprint for other nations looking to leverage key stakeholders for industry growth and build effective use cases for their wider financial markets.
Aiming for a balance
In November 2021, the Monetary Authority of Singapore (MAS), Singapore’s central bank and financial regulatory authority, shared Singapore’s ambitions to become a hub for sound and well-regulated digital assets with value-adding use cases. Efforts have been continually made to achieve a delicate balance between encouraging blockchain innovation and protecting investors from the risks of participating in a promising but nascent market.
Initiatives were introduced to enable institutions to explore decentralized finance (DeFi) applications and the concept of a digital Singapore dollar through Project Ubin, Project Orchid, and Project Guardian.
Singapore’s strength in coalescing professionals in the financial sector was highlighted through the TOKEN2049 conference. Held in Singapore, the conference attracted over 7,000 participants including venture capitalists, financial institutions, and crypto, DeFi and infrastructure projects to discuss the future of crypto and facilitate new and ongoing developments.
When it comes to private-sector investment in blockchain, Singapore holds the number two spot in the world after the leading player United States in terms of the number of deals, with Singapore-based projects making 566 deals and raising $3.9 billion over the past six years, according to research from The Block. Only the U.S. and the U.K., at $38.6 billion and $5 billion respectively, had deals that cumulatively raised more.
Investments from within Singapore through Temasek, the nation’s sovereign wealth fund, also highlighted its seriousness in being a key player through investments in gaming, NFTs and other ecosystem players.
We’ve begun to see a physical shift of projects to Singapore, as it is attractive not only because of a favorable business climate due to taxes but also the rule of law and certainty of business continuity. For example, crypto projects have left China following greater restrictions around business and Covid. Blockchain node operators are also increasingly making Singapore their home as projects seek to decentralize their operations in reliable hubs around the world.
These strengths in technical developments, institutional participation and investments will shape Singapore as a crypto hub in the years to come.
Working with the private sector
Last year, we saw a significant global shift in institutional interest toward crypto and DeFi. BlackRock, the world’s largest asset manager, began trading digital assets, and HSBC planned to move the settlement of US$20 billion in assets onto a new blockchain-based custody platform.
Just last month, Société Générale, a France-based bank, withdrew US$7 million worth of MakerDAO’s stablecoin DAI from its vault, which had been credited with a limit of US$30 million in DAI. The vault is backed by 40 million euros in bonds in the form of “OFH tokens” — tokenized securities issued on Ethereum and collateralized by AAA-rated French home loans.
This year will see a greater exploration of permissioned DeFi that can increase transparency among stakeholders involved and potentially facilitate industry-level, near-instant settlements across borders.
Permissioned DeFi, which includes a whitelisting process through identity and background checks such as know-your-customer (KYC) and anti-money laundering (AML) procedures, can help institutions that adhere to strict compliance rules ensure their trading counterparties have been vetted. This approach stands in contrast to the majority of DeFi, which is completely permissionless, enabling essentially anyone to access liquidity pools. Promising zero-knowledge developments in 2023 that help preserve data privacy through zk-STARKs and zk-SNARKS will help counter objections against KYC and AML use that exposes information to centralized parties.
Aave Arc, a permissioned version of the lending protocol, Aave was released in early 2022. Just last November, we saw a major bank, for the first time, tokenize deposits on a public blockchain. This historic moment was spearheaded in Singapore, under the supervision of MAS, in which banks including DBS Bank and JPMorgan conducted foreign exchange and government bond transactions on Polygon, utilizing a modified version of Aave Arc.
Project Mariana, which includes the central banks of Singapore, France and Switzerland in the study of integrating DeFi features with central bank digital currencies (CBDCs), is also underway. These projects could see greater advancements this year.
Pushing for real-world uses
Better integrations of crypto with the real world could also help to better reveal its value such as its lower costs, increased efficiency, and reduced risk in financial transactions.
Project Orchid, a government-industry initiative aimed to develop the infrastructure and technical competencies necessary to issue a digital Singapore dollar, was rolled out last October with industry players including DBS Bank, Central Provident Fund (CPF), Grab, UOB and OCBC. Wealth management products are also being developed by HSBC, Marketnode, and UOB in partnership with MAS. Continuous efforts like this push progress locally in the direction of useful implementation in the wider economy.
Beyond finance, we’re seeing examples in industries like property, education and healthcare. Tokenization of property development is being made possible through the Fraxtor digital platform, which bridges investors and real estate investment opportunities originated by private equity managers. In October 2022, Fraxtor, a qualified real estate tokenization issuer, tokenized two redevelopment projects that involved a freehold and bungalow site in Singapore. This marked important efforts towards transforming real estate which has historically been a fundamentally indivisible and illiquid category of assets.
In addition, the education and health sectors are seeing traditionally complex processes being simplified through solutions like Accredify which issues verifiable documents that are tamper-proof and with IDs stored on the blockchain. Going beyond an initial focus on making education credentials easy to store and share, late 2022 saw the technology used to issue more than 1 million covid-19 rapid antigen test results in partnership with an IOT startup, Beep. We’ve also seen other platforms rise such as Opencerts, a platform that generates cryptographic protections for educational credentials, and HealthCerts which helps to provide tamper-proof, secure, and digitally transmitted health certificates for convenient global travel.
These use cases can help foster organic growth and more useful applications of crypto in industries that are significantly valuable in the wider economy.
Industry and institutional involvement will continue to be key to the flourishing of Singapore as a crypto hub this year, with a strong foundation built in 2022. Beyond the convergence of DeFi and TradFi, we could see more integrations of real-world products connecting to blockchain and DeFi. Robust support by the government for the industry and the continued entrants of more blockchain experts will contribute to an accelerated pace of growth. Singapore’s approach should be seen as a blueprint for other nations seeking to grow their crypto industry and build their wider economy.