Blockchain is much more than just a technology that will transform digital commerce. As the fulcrum of decentralized finance, known as DeFi, blockchain will also transform financial services — to the detriment of advisors who fail to adjust and prepare their practices.
The rationale behind DeFi is that individuals should be able to invest and conduct transactions on their own, without relying on what proponents call centralized entities — financial institutions that thrive on their role of middlemen charging fees. DeFi is about decentralizing these functions so that people can engage in them on a DIY, peer-to-peer (P2P) basis.
The DeFi movement, which has spawned various startup firms now in business and hundreds more in various stages of development, holds that financial services should be controlled by and for those who enable institutions to earn colossal profits by allowing them to use their money in banking, trading securities and providing insurance.
Blockchain technology applications are opening up a brave new financial world where consumers are: shopping online and paying routine household bills using cryptocurrency instead of what they call fiat (government-backed) currency or credit cards; accessing digital banking like services offered by startups like the Celsius Network, a new type of banking services platform that isn’t FDIC-insured but pays extraordinarily high interest rates on deposits; trading securities on OX, an open protocol allowing the exchange of assets P2P over the Ethereum blockchain; buying insurance through P2P pools over Etherisc; and trading in fractional ownership of heretofore inaccessibly pricey assets through tokenization — the splintering of the value of just about any asset into tradable tokens — on sites including Swarm, Harbor and Polymath. Already, investors are buying small pieces of ownership in works of fine art. Eventually, just about any asset — an apartment building in Tokyo, a piece of an NFL basketball team or you-name-it — might be tokenized, changing the definition of assets and globalizing investment in just about anything in a 24/7 context.
The implications of DeFi for the future of advisors are profound. Over the next five to 10 years, digitally inclined clients will be using more and more blockchain-based services and cryptocurrency to manage assets on their own, disintermediating traditional advisory services and stanching advisors’ revenue streams as the traditional advisory commission/fee structure fades.