Russia’s largest state bank, Sberbank, is now exploring the world of decentralized finance, best known as DeFi in the cryptocurrency industry. Sberbank is one of a handful of traditional banks worldwide trying to profit from the DeFi market, which some have estimated to be a $13 billion market. Sberbank is building its own Ethereum tools on the Ethereum blockchain.
“This will give our clients access to new types of financial products and services,” a Sberbank spokesperson told me.
Sberbank began its DeFi exploration in July 2022, roughly six months into the Russian war with Ukraine. The bank created a proprietary platform for registered securities firms (and accredited investors) to issue their own tokens or invest in them and other cryptocurrencies. Sberbank’s spokesperson said that in the “near future,” the (now sanctioned) Russian bank will allow retail clients to use and trade Ethereum-based digital assets. The bank’s role will mainly be to provide information and advice.
“This scenario will be invisible to the customer. They won’t know what DeFi protocol or blockchain their bank is using. All they will know is that they have an opportunity to earn a higher yield on their deposits than they do now by investing through their traditional bank in DeFi products,” says Jeremy Epstein, CMO at Radix
For sure, a whole new financial industry is being born.
From Russia To Brazil
In another BRIC market, Brazil’s leading bank, Itau, partnered with the Central Bank of Brazil’s “Lift Lab” to experiment with DeFi as well.
“It’s hybrid finance, where the traditional banking market is merged with the digital one – namely via blockchain technology,” says Guto Antunes, head of Itau Digital Assets in Sao Paulo. “We see it as preparing the bank for a new generation of clients who have formed different habits and are aware of the tokenization of financial services.”
Like Sberbank in Russia, Itau is also using Ethereum.
There are other DeFi blockchains competing with Ethereum, such as Solana
The consensus is that TradFi will not kill DeFi. For now, the relationship between BRIC banks and the global Ethereum community could be described as a friendly courtship.
What It Looks Like When TradFi Meets DeFi
“There is going to be a lot of hand-holding,” Epstein told me in an interview. “In effect, TradFi will serve as front-end gateways to DeFi, giving customers who want custodianship and advisory services the option to have that. The first example of this relationship is quite rudimentary, but you could look at Fidelity offering custody of bitcoin as the first steps in the TradFi/DeFi relationship.”
With the “hybrid finance” model that Sberbank and Itau are talking about, a traditional retail bank could offer crypto staking services as a feature for regular bank accounts. The banks will manage all the different accounts as a service for their customers. A new finance subsector is being built around this TradFi/DeFi merge.
Banks with asset management operations, like Sberbank or the Spanish DeFi-friendly bank Santander, can extend their product lines. Some investments might even be insured in a similar way savings are insured by the FDIC up to $250,000.
The motivation for banks exploring DeFi tools for TradFi customers is the hope of offering more product choices at lower costs.
“Banks and other financial institutions will have to compete on customer service since people can just go direct to DeFi exchanges and do it themselves,” says Epstein. “For those who choose to go through Bank of America
The Global DeFi Boom
More than 40% of banks worldwide are experimenting with some form of blockchain technology today. Lower cost, transaction speed, and DeFi is the reason, says Roman Troskin, Strategic Marketing Director at BDC Consulting in Estonia.
“You may not even suspect that your daily purchases, transfers and other transactions in your bank are being carried out and stored on the blockchain,” Troskin says. “Twenty years ago, no one could imagine buying stocks on your phone. But now it’s a reality and even slightly outdated. Forget cryptocurrencies. The main thing here is the blockchain and the technological development that it brings to traditional finance.”
On the other hand, regarding cryptocurrencies in particular, a report by San Francisco-based market research firm Grand View Research estimated the global DeFi market will expand at a compound annual growth rate of 46% from 2023 to 2030. The future may not be a binary world of bank blockchains or decentralized cryptocurrencies, but of both co-existing.
“Our mission is to provide a new level of confidence in the (DeFi) market,” says Antunes from Itau bank. “We will be ready to offer the best services in digital assets…as soon as the regulation (in Brazil) allows it.”
TradFi and DeFi may live happily ever after. However, regulatory bodies will either allow this coexistence to work or ruin the love affair. For now, some banks are hoping that tapping into crypto trends will combine the best of both worlds.