Hybrid finance expands the frontier of the financial industry such that investors can take advantage of regulated, simple, and yet autonomous solutions.
From all indications, the financial world is constantly evolving to fit into the globalization and digitization movements currently sweeping across industries. Conventional solutions are looking to digitize financial processes cautiously without sacrificing inclusiveness and users’ safety. On the other hand, we have decentralized finance (DeFi) protocols focused on fast-tracking globalization and eliminating third-party inputs from day-to-day banking and financial processes.
For the most part, both sides of the financial spectrum seem to utilize opposing methods of disseminating and accessing financial services. While centralized solutions establish custodians that oversee the entirety of the systems, DeFi-enabled protocols preserve users’ autonomy. Understandably, these contrasting systems have had ideological clashes, with both sides of the divide looking to establish their respective financial model as the more superior.
As expected, Centralized finance, to an extent, remains the obvious choice for many due to its regulatory-backed model. More often than not, we gravitate towards tested and trusted systems, especially those licensed by regulators. However, as witnessed in the last couple of years, DeFi is an innovative system. It offers suitable solutions to some pertinent issues like the cost of doing business, the lack of transparency, and unnecessarily long financial processes.
While the unregulated nature of DeFi does not diminish its innovative power, it does put a question mark on the technology’s readiness for mainstream adoption. Caught in the middle of this ongoing debate are users, most especially institutional investors, who understand the potential of DeFi but do not have the luxury of fully embracing open finance. To this group, the regulatory uncertainties of DeFi outweigh its apparent benefits.
That said, there seems to be a way around this problem. We could handpick the inherent strengths of DeFi and integrate them with a regulated business model. Herein lies the essence of Hybrid Finance.
What Is Hybrid Finance?
Hybrid Finance stemmed from an intent to commercialize DeFi by introducing elements of centralized finance. The goal is to nurture DeFi strong suits while eliminating its flaws, especially irregularities, complexities, and lack of standards. Hence, an average HyFi solution still maintains blockchain attributes like immutability, transparency, speed, and smart contract-enabled financial processes. In addition to this, it strives to comply with regulatory requirements and provides the level of convenience associated with centralized solutions.
In most cases, there is a conscious attempt to provide DeFi services to market segments that would ordinarily avoid the complications associated with decentralized financial tools. For instance, DeFi.finance, an Estonia-licensed automated market maker (AMM), has devised a way of providing decentralized exchange services to institutional investors. The platform looks to help institutional investors demystify DeFi by enabling a regulated ecosystem for trading and swapping coins autonomously.
For a platform like DeFi.finance, it is critical to materialize a widely accepted standard and regulatory framework for DeFi. Hence, it plans on complying with strict KYC and AML policies. With this, institutional investors do not need to worry too much about the regulatory implications of DeFi while enjoying the benefits of using an optimized crypto exchange.
What does Hybrid Finance Bring to the Table?
As exemplified by the workings of DeFi.finance, HyFi converges DeFi and traditional finance such that the weaknesses of the former are eliminated effectively by the strengths of the latter. When discussing the benefits of adopting HyFi, none is as critical as how regulatory compliance elevates the status of open finance.
Institutional Investors are mandated to restrict their activities within the regulated financial realm. So, before now, they could not fully explore the opportunities of decentralized finance and avoid the reputational and regulatory penalties that usually come with using unregulated products. Hence, having KYC and AML compliant HyFi products is a big deal. For one, institutional investors that opt for these solutions can ascertain that they are not involved in illegitimate operations or activities prone to attract the wrath of regulators.
Also, it is only a matter of time before regulators begin to introduce frameworks for the DeFi ecosystem and target defaulters. When this happens, there are bound to be casualties. Not many Investors, users, or service providers will be able to cope with these disruptions. Hence, there is every reason to opt for licensed and KYC/AML-enabled HyFi solutions so that the regulatory disruptions would be as minimal as possible.
Apart from the regulatory clarity that HyFi provides, it also does away with excessively complex processes. Note that convenience is one of the strong suits of HyFi. Therefore, parts of the improvements that HyFi offers are simplicity and high usability. These solutions integrate seamlessly with existing financial systems, thereby allowing users to collaborate and connect as they wish. In other words, investors do not need to outrightly detach from legacy systems to enjoy the high-yield investment opportunities of open finance.
The financial industry has begun to realize that DeFi and traditional finance can coexist and, in the process, create an even more potent financial paradigm. Hybrid finance expands the frontier of the financial industry such that investors can take advantage of regulated, simple, and yet autonomous solutions.
Founder and editor at BTC PEERS. Andrey writes about financial experiments, DeFi, cryptocurrency, and blockchain.