Permissioned DeFi for cross-border transfers is coming, but wholesale CBDC and Deposit Tokens will be first to market.

Network ownership and profits will be a major sticking point!

Nov 24, 2023

Permissioned DeFi is fabulous tech, its adoption will depend on who runs the blockchain network. The full article from BCG can be viewed: here

👉TAKEAWAYS

BCG and Fireblocks estimate that the average transaction cost in the new model will be 60%–80% cheaper than the cost incurred by traditional models.
Estimated operational and IT costs per transaction range between $0.05 and $0.09—far less than the $6.40 estimate for traditional payments.
A permissioned DeFi model offers better Know Your Customer (KYC) verification, providing more payment control.
Unlike SWIFT, AML/KYC is embedded in the smart contract, NOT on the system!
Benefits include nearly instant settlement, traceability, and users interacting directly. B2B transfers!
Who runs the system will be CRITICAL.
Large institutions like JP Morgan or a bank consortium will want to run the blockchain network and charge fees for access.
Many banks will reject this model! (see Straight Talk below for an example.)
This only works when creating a non-bank, supranational, or non-affiliated entity that controls access and whose fees do not benefit competitor banks.
Set-up is lengthy, and wholesale CBDC and deposit tokens will beat it to market.
First to market isn’t everything, and I love this solution!

👊STRAIGHT TALK👊

I love permissioned DeFi networks for cross-border transfers but am wary of who will run the networks.

First, let us ensure that we all understand that permissioned DeF is different from crypto DeFi. While the smart contracts and underlying blockchain technology come straight out of crypto, the network will not be decentralized, and access will only be allowed for financial institutions meeting acceptance criteria.

With that out of the way, let me state categorically that this is the asset transfer system of the future. It has many benefits, and I agree with the authors that this is a technology whose time has come.

The problem

The authors point to access being controlled by “appointed third parties” and a “consortium” model for the blockchain network itself.

This solution will only work if the network is NOT directly owned by the consortium of banks using it. It must be owned and or operated by an independent entity that controls access fairly and openly. Profits from running the network do not revert to individual banks.

I can see a large bank like JP Morgan, with its Onyx blockchain subsidiary, setting up a network like this individually or with a consortium and charging for access. This would defeat the universality of the solution and break it into rival systems.

Zelle a consortium gone wrong

If that sounds farfetched, let me give you an example of how the Zelle consortium fragmented fast payments in the US.

Formed by a consortium of major banks, Zelle tried to charge smaller institutions for use. These smaller institutions rebelled and complained to the Fed that their payment for access benefited larger bank competitors. The Fed agreed, and the new FedNow was born!

This is why an independent entity needs to be formed, not just a consortium of banks. This is happening now with the mBridge CBDC transfer system in Hong Kong. None of the founding central banks for mBridge will have control of the blockchain network or profit from it.

That is the ONLY way this system will fly, so I see this as a solution that is still more than a few years away.

I love permissioned DeFI, but it needs substantial “set-up,” wholesale CBDCs, and deposit tokens will be first to market.

Not being first to market doesn’t mean permissioned DeFi won’t be great! It will be!