DeFi: Leveraging on Digital Banking Regulations for Investor Protection

Asia Blockchain Review
September 6, 2019

From the outset, the aim of decentralized finance (DeFi) has been to offer an alternative to the conventional financial industry in which banks play a substantial role. Nonetheless, as banks have been around since 2000 BC it is no easy feat to challenge the stronghold of the global banking industry. Although the DeFi market has locked in about half a million USD worth of investments as of the end of August 2019, this is a mere drop in the ocean compared to the global banking industry’s market capitalization of USD 7.1 trillion at the end of Q2 2019.

Digital Banking Regulations as a Remedy for DeFi’s Pain Points

If DeFi is to have any chance of giving conventional financial institutions such as banks a run for their money, a speedy yet effective resolution to the critical issue of a lack of investor protection measures under the DeFi framework is required. In this regard, some industry observers have put forth the idea that DeFi should leverage digital banking regulations to provide protection for its investors. DeFi after all offers financial services which are not unlike those provided by conventional banks, albeit through the use of blockchain as its underlying technology. In this regard, it is notable that Switzerland’s Financial Market Supervisory Authority (FINMA) recently awarded provisional banking and securities dealer licenses to Sygnum AG and SEBA Crypto AG, thereby establishing the first two legally recognized crypto banks in the world.

Digital Banking Regulations in Southeast Asia

If digital banking regulations are indeed the panacea of the DeFi industry, the growth of DeFi in Southeast Asia would hinge on the extent to which such regulations are in force in the region. Building on this proposition, DeFi would presumably make headway in Singapore, as the Monetary Authority of Singapore (MAS) announced in June that it will be issuing two digital full bank (DFB) licences. Based on the announcement issued by MAS, one of the eligibility criteria for a successful DFB application is that it must provide a clear value proposition which incorporates the innovative use of technology to serve customer needs and reach the under-served segments of the Singapore market. As the central tenet of DeFi is to leverage blockchain to promote financial innovation and inclusion through the use of cryptocurrencies, a crypto bank using the DeFi framework would be a perfect fit with the aforementioned criteria for obtaining a DFB from MAS. Little surprise then that Swiss-licensed pioneer crypto bank Sygnum AG is reportedly looking to obtain a banking license from MAS for its operations in Singapore

Across the Straits of Johor, Malaysian regulators are trying to play catch-up with its city-state neighbor as Bank Negara Malaysia (BNM), the country’s central bank, announced in June that the regulatory framework for digital banks is “50% ready” and expected to be launched by the end of the year. Notwithstanding its lack of a regulatory framework for digital banking, Malaysia does have a local blockchain startup in the form of FINX, which aims to provide affordable and efficient banking solutions to financial users in Southeast Asia through its Decentralized Banking Platform. This platform leverages blockchain to provide remittance, payment and financing solutions as well as crypto-fiat conversion facilities, though FINX does not operate in Malaysia and currently has no plans to do so. Malaysian regulators may have their work cut for them in their efforts to keep pace, whereby their upcoming regulatory framework for digital banks would have to be up to task lest the development of DeFi in the country become hampered by the reluctance of industry players, including local ones, to offer their services there.


The prospect of DeFi leveraging digital banking regulations to provide protection for its investors may help pave the way for future developments, as it would foster some much needed trust and confidence in an industry which is still very much in its infancy.

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