Decentralized finance — DeFi for short — is taking its place among the buzzwords of 2021, where excitement (and depending on where you look, perhaps hype) comes in tandem with true tech-driven potential to disrupt the financial services status quo.
Max Carnecchia, CEO of Mitek, told Karen Webster that increasingly, there would be an intersection between DeFi and digital identities — because DeFi will need them to keep trust in place and keep it all functioning.
In a way, it’s not all that different from traditional finance — except Know Your Customer (KYC) protocols will need a decidedly high-tech update.
Drilling down into just what DeFi is, Carnecchia said that — in a nod to the act of decentralization itself, and the distributed technology platforms in particular — “it’s a tech driven innovation” that is giving rise to the disruptive changes that are currently flowing through the financial industry.
And, eventually, he said, the disruption will be profound and far-reaching, touching all manner of industries and interactions.
And while the headlines swirl about crypto and bitcoin and non-fungible tokens (NFTs), Carnecchia said that decentralized technology platforms could and will have all sorts of use cases across verticals, across consumer and commercial settings.
But there’s a single overarching theme.
Whether it’s a commercial transaction for a bank, a citizen interacting with their government, a student with their school or a patient with the healthcare system, as Carnecchia put it: “Understanding [that] you’re doing business with and establishing that identity is critical for any kind of transaction.”
And yet, as Webster noted, in decentralized finance, as those ecosystems emerge, there are no requirements comparable to what we have seen in traditional banking that makes the experience secure and safe.
Describing DeFi as still in its “nascent stages,” Carnecchia noted that banks that adopt a distributed technology platform or a decentralized technology platform for some application still will exist as a regulated entity.
“And you’ve got to live up to those regulations. It’s that gray area between where crypto is today and where big banks are today,” he said.
Trusting in the trustless ecosystem, if DeFi can be described that way, means embracing technology and protocols that provide the confidence needed on the part of the transacting parties that the people they are doing business with are legit.
The issue of establishing digital identities is gaining urgency as central banks dive into developing central bank digital currencies, as tokens take shape to move transactions across borders, and of course, as hackers try time and again to co-opt cryptocurrencies with ransomware. Any alternative banking ecosystem, he said, will still draw the scrutiny of regulators. Some self-regulation may be in order for the players themselves, who want to build, scale, write applications and continue the innovation cycle.
A Consortium Approach
When it comes to setting up digital IDs, he said, “you can very easily see a banking consortium come together or even individual players.” DeFi stakeholders can take some direction from the fact that there’s nothing inherent about blockchain that requires anonymity.
He pointed to identity verification firms like Mitek that can establish identity in the onboarding journey or when identities need to be re-verified in the process of transacting.
“We know that nobody wants to remember a password. Nobody can remember the user ID when you’ve got to get a one-time password,” he said. The future of digital IDs, at the intersection with DeFi, he said, may be tied to voice, a visual of a face or with a fingerprint on a phone.
“That’s where the future has to go — to become more and more frictionless, more where verification is just not something you even think about. It just happens and it’s accurate. And it’s safe.”