Definitions are always tough to sift through, and crypto is really just one instance of a much larger set of challenges faced across the fintech ecosystem to defining the parameters of policymaking. Indeed, there are few better examples of the term “decentralized finance.”
I’ve tackled the definitional question of “decentralization” before in this column, when thinking through the challenges of blockchain-based financial ecosystems. But “decentralized finance”—despite attempts by crypto proponents to monopolize the term—often refers to a range of broader developments that have even more profound repercussions across the fintech ecosystem.
In its simplest sense, decentralized finance is a structural term that relates to how software systems are built. The key inquiry is whether operating systems run through a central point of control and administration. From this standpoint, permissionless blockchains epitomize blockchains to the extent to which, at least in principle anyone with the software loaded onto their laptops can compete to try to memorialize transactions on the Bitcoin ledger and acquire new Bitcoin in the process.
But decentralized finance need not relate to operating systems. In a very real sense, it can also refer to hardware applications. Consider Uber. Here, a distributed and far flung array of hardware (customer and driver cell phones) are the funnels through which transactions are consummated on the firm’s payment platform.
Or even the Starbucks “card”—the mechanism through which the company is essentially able to fund its operations in part through geographically dispersed deposits made through its millions of customers. In the truest sense, it too serves as form of decentralized finance: By offering anyone the opportunity to store value onto a card an on its Mobile App, Starbucks has reportedly secured $1.6 billion in stored value card liabilities outstanding, nearly 6% of all of the company’s liabilities.
For the crypto-community, these latter examples can be especially perturbing because they speak to instances where transactions are still, whatever the hardware, still funneled through a centralized platform. Individuals have accounts, and policies are ultimately commandeered and controlled by a specific firm. Thus whatever the operationalization of finance, control, many would observe, is ultimately centralized.
Still, crypto holds no control over decentralized control, should that be the point of definitional emphasis. Besides the fact that plenty of crypto ecosystems reflect considerable control, fintech entrepreneurs have long developed technologies in even legacy infrastructures and ecosystems designed to wrest control from incumbent players. Consider here the example of high frequency trading. Far from enhancing central points or nodes of influence, the ecosystem is largely designed to exploit pricing gaps in electronic trading platforms—and to enable trade execution autonomously, and independent of human decisionmaking.
An even better example can be found in the open banking. Traditionally, banks have made key decisions about what to do with consumer and customer information.. But increasingly, new kinds of firms and fintechs—think Plaid—have worked to enable customers to control how their banking information is used, all in the service in better, customer-oriented financial services. This kind of innovation is not just structural, depending on far flung APIs as nodes for information gathering—but also in terms of power, reversing the hierarchy of decisionmaking between banks and their customers.
The trick in all of this is, of course, that accompanying this decentralization of finance is a decentralization of the regulatory ecosystem itself. Instead of top-down international legal systems, an increasingly broad array of regulators plot their course of actions for fintech. And where they do on a cross border basis, they don’t do so in terms of formal legal obligations, but usually do so via “soft law”—informal obligations subject to interpretation by regulators at the domestic level.