Jonathan Galea of Blockchain Advisory discusses DeFi and stablecoins

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‘Fintech’ and ‘decentralized finance’ are common buzz words within financial services. Speaking exclusively to CoinGeek at the AIBC conference in Malta, Jonathan Galea, the managing director of Blockchain Advisory, explained the key differences between the two.

While fintech encapsulates a number of technologies setting out to disrupt financial services, decentralized finance is a more precise term, according to Galea. He said that decentralized finance, or DeFi, was specifically about ways of disrupting financial services through blockchain.

While acknowledging DeFi is set to disrupt certain regulatory practices and lead to the creation of new instruments and financial services, Galea said there were significant challenges still to be resolved.

Specifically, he gave the example of new financial instruments created by the blockchain, which often leads to a state of regulatory limbo. New instruments can provide utility, but do not always fit within existing legal frameworks.

In some instances, regulation within current frameworks may be appropriate, while in other cases, existing rules are insufficient to apply. In other circumstances, there is simply no way of knowing, with the problem further compounded by different legal systems across jurisdictions.

Pressed on when these issues were likely to be ironed out, Galea said he was unsure. However, he highlighted progress being made in some jurisdictions towards clarifying the legal position, which would ultimately allow financial services sectors to reap the full advantages of decentralized finance on the blockchain.

The Malta Financial Services Authority (MFSA), for example, is set to launch a regulatory sandbox later this year for firms looking to explore DeFi. The sandbox will create a regulatory safe space in which to do business, and could ultimately lead to new legislation designed specifically to address the needs of decentralized finance.

Galea also mentioned the significance of DeFi for stablecoins, as a potential tool for eventually converting stablecoins into decentralized, rather than centralized assets.

While the technology is still in development, Galea noted that DeFi could remove the centralized backing element built in to the current generation of stablecoins, to create a truly decentralized token in future.

Although regulatory gaps remain, and continue to pose challenges for developers, Galea is hopeful the technology will one day reach its full potential, with support from regulators and appropriate legal frameworks.