August 13, 2022

Rise of decentralised finance


EXPONENTIAL growth of decentralized finance in recent years is causing disconcert in traditional financial sector. For those who may not be aware of growing developments let me begin with basics.

Traditional financial sector comprises of capital markets, banks, equity and bond markets. Typically, entire financial sector is regulated by government through regulators and a maze of financial laws.

For example, in Pakistan, Securities and Exchange Commission (SECP) is the corporate regulator while banks are regulated by State Bank of Pakistan. Government’s oversight of financial sector does accrue a certain benefit. It is not possible to get up one morning and start an investment scheme soliciting money from people.

Aim of regulation of financial sector is to protect common investor from Ponzi schemes. As the financial sector is highly interdependent, governments are also wary of systemic failure in case of bank going into default causing a run on other banks.

Decentralized finance allows users to engage in activities of financial nature without meeting regulatory framework of the country. Let’s assume I want to raise capital for a business venture from general public.

For this purpose, I would need to float and sell shares to the public at large for which I would need to arrange for an initial public offering (IPO). This IPO would need to follow the requirements of Companies Act 2017 and meet certain standards. Invariably, in any country, offering…

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