Finances: conservative, libertarian or sustainable?

Reflecting the political tensions that permeate society, traditional finance is divided into two protesting currents: left, stable finance, right, libertarian finance.

Published at 9:00

Stable financing, especially with the support of large institutional investors, fights climate change and contributes to the common good, two goals that are considered compatible with the long-term profitability of the investor.

Libertarian finance, driven by the “crypto-brothers”, offers a decentralized version of finance, where the state and large institutions do not poke their noses and where risk and rapid enrichment are valued under the guise of the noble goal of democratization.

Driven by these two radical currents, the center’s traditional finances seem conservative and risk becoming obsolete if not adapted.

Of course, these labels are reductive, and the reality is much more nuanced. However, they provide a better understanding of the trends that are transforming finances, bringing with them values, challenges, risks and upgrades.

Libertarian finance, known as “DeFi” (for decentralized finance), unites individuals, bypassing banks and insurers, regulated institutions of traditional finance.

DeFi is technically very complex. It looks like a Lego game, the components of which can be assembled in several ways. However, there are four layers.

In essence, decentralized registries, called blockchains collected by miners, compete for energy-intensive payments to make payments and record transactions. Fortunately, some circuits are evolving to a method that consumes less electricity.

Winners are paid bitcoins or other tokens, cryptocurrencies, which are the currencies and values ​​of decentralized finance, of which there are 13,000 types.

Some networks, such as Ethereum, have codified “smart contracts”, ie protocols that automatically perform operations under certain conditions. These contracts generate tokens and allow you to make deposits, loans, derivatives, and manage cryptocurrency portfolios.

The last level includes programs or interfaces that make it easier for users in this fully digital universe. It is accessed through various automated trading platforms. All this technology should be accessible and transparent – if you can read codes.

Cut out the middlemen

DeFi supports the ideal when financial services are faster, personalized and accessible to people who are not noticed by the traditional system. It is cheaper, first of all, to do without expensive and inefficient intermediaries, such as regulated agencies, say Campbell Garvey and co-authors in the book. DeFi and the future of finance.

“While DeFi can rely on libertarian ideals, such as its own rules, created and implemented by the community in the common interest of the parties, new blockchain systems are at risk of being infiltrated by a small group that can break the rules. in his favor, ”warns Eswar Prasad, a professor at Cornell University and author of the book The future of money.

This risk is also included in the long list of risks posed by DeFi, according to competent authorities such as the International Monetary Fund, the International Organization of Securities Commissions (IOSCO) and the Financial Stability Board.

This list includes, but is not limited to, money laundering, terrorist financing and market manipulation by fraudsters, problems that also affect traditional finances, but where criminals are often caught by the authorities.

According to IOSCO, last year the total value of money stolen by hacking smart contracts, software and cryptocurrency wallets exceeded 10 billion US dollars, including 2 billion US dollars only for DeFi, which increased by 1300% in one year!

DeFi remains connected to TradFi, the nickname it gives to traditional finance. For many transactions, it uses “stablecoins”, the fixed value of which, often in US dollars, is provided by the reserve of traditional money market instruments.

However, this sometimes incomprehensible reserve can lead to a spread of liquidity crisis, which threatens the stability of the entire financial system.

The main problem of DeFi is its main feature: the lack of regulated financial institutions that would ensure its reliability, market integrity and protection of individual investors. I am not sure that the implemented self-regulatory mechanisms will prevent crises.

But how to regulate virtual networks without an e-mail address? Despite a poorly adapted legal framework, regulators are referring to stateless trading platforms. Some regulate their status, others slip away, having something to hide.

What’s up ?

DeFi strives to be democratic, but at this stage of its evolution it remains self-centered, reserved for insiders. In practice, his innovations essentially serve to speculate on pure abstractions in which we see no economic or social utility. He does not direct savings to mortgages to buy a house or to invest in building a factory. Retirement is still too risky.

On the contrary, sustainable financing aims not only to provide these traditional financing services, but also to provide the huge capital needed to move to a decarbonised economy.

He also cares about the well-being of employees and the communities in which he invests. But it also has difficulties that need to be overcome, such as green cleaning.

These two currents are still young and in the minority, but will be addressed through the integration and transformation of traditional finance, which retains a huge capacity to adapt to social movements and technological change.

Caisse de depot, a world-renowned leader in sustainable financing initiatives, plunged into DeFi by buying a stake in Celsius Network, a cryptocurrency trading platform. The technological innovations that are growing in DeFi are too important to ignore, and several institutional investors are wary of them.