You’ve probably already heard of decentralized finance (DeFi), a revolution that has reshaped the financial landscape around the world by providing an alternative, decentralized approach to traditional financial systems. Southeast Asia appears to be one of the regions most affected by this wave of transformation due to its a growing population of tech savvy.
However, even though the future of a decentralized world is bright, are there any obstacles preventing the widespread adoption of this technology? In this article, we examine how DeFi could benefit the region, as well as the associated risks that stakeholders face.
What is DeFi?
DeFi leverages blockchain to democratize financial transactions, allowing them to be executed without the need for a central authority such as a traditional bank, making them decentralized. Some examples of these transactions include lending and borrowing, trading (swapping) tokens on the blockchain, purchasing insurance, and depositing your tokens into a liquidity pool on a decentralized exchange and earning fees every time a user makes a token swap.
To interact with this technology, a user simply downloads a non-custodial wallet, which can be likened to a digital personal vault stored on the blockchain. Users can download wallets like MetaMask, Trust Wallet, or many others and deposit funds there. This allows users with crypto wallets to access a wide range of decentralized applications.
Southeast Asian countries – including Vietnam, the Philippines, Thailand and Indonesia – have already demonstrated their willingness to take advantage of technological advances. These countries all rank among the top twenty in the ranking. Chainalysis Global Cryptocurrency Adoption Index 2022further highlighting the region’s desire to harness the benefits of DeFi.
Why is DeFi needed in Southeast Asia?
Although Southeast Asia has become one of the fastest growing regions in the worldmore than 70% of the adult population is either underbanked or unbanked – which means they have limited access to financial services.
While initiatives like Buy now, pay later (BNPL) have emerged to address this problem, DeFi has the potential to offer a full range of financial services tailored to this underserved population.
In countries like the Philippines, one of the obstacles encountered by this population Access to traditional financial services comes from the absence of a reliable personal identification system. Due to the difficulties encountered in adopting a law providing for a nationwide identification system, the Philippine Identification System (PhilSys) was only implemented in 2018, and it was plagued by encoding errors and an influx of fictitious names. This makes it difficult for banks and businesses to verify the identity of the customer before providing them with financial services.
Moreover, a study conducted by Google, Temasek and Bain & Company in 2019, highlighted the lack of reliable traditional data such as tax returns and formal employment documents in Southeast Asian countries outside of Singapore. This hinders consumers’ ability to access credit or demonstrate creditworthiness.
Decentralized financial services offer a completely non-custodial alternative solution. Unlike traditional services, decentralized wallets require no know-your-customer (KYC) verification, allowing anyone to access financial services such as lending and borrowing, regardless of their financial situation.
Another challenge in the region is the limited interoperability of payment systems between Southeast Asian countries. The region is home to many migrant workers, who leave their home countries to seek employment opportunities in other parts of the region. As a result, they need a reliable way to send funds to loved ones back home.
This challenge is compounded by the lack of a standardized currency across all Southeast Asian countries. When these migrant workers send money home, they are often faced with the need to make currency conversions. This process usually involves engaging with financial institutions to convert their income into their family’s local currency. Unfortunately, this currency conversion process often comes with high fees and unfavorable exchange rates, further burdening people sending money to their loved ones.
While Southeast Asian countries have committed to establish a cross-border payment system in the near future, blockchain constitutes an interesting alternative for such payments. Existing money transfer providers may charge high fees where necessary. reported by the Asian Regional Integration Center that the average cost of sending $200 in cash to Southeast Asia was just over 6% in 2018 – a significant amount for many.
Blockchain provides a more cost-effective way to transfer funds between countries. Typically, most blockchains require you to pay transaction fees, which are determined by network congestion and remain the same regardless of the transaction amount. Therefore, when sending a substantial amount of money, it can effectively mitigate the costs associated with the transaction.
Additionally, some decentralized applications offer a multi-send feature that allows users to send funds to multiple wallets in a single transaction. This feature not only simplifies the fund transfer process but also allows users to save on transaction fees.
What are the barriers to DeFi adoption in Southeast Asia?
Despite the immense potential of DeFi for the region, there are still some obstacles hindering the widespread adoption of this technology.
Southeast Asia is a linguistically diverse region, each country having a distinct national language. While some decentralized applications like Pancake swap offer multilingual support like Bahasa Indonesia, Filipino, and Tiếng Việt, this feature is not common on other platforms.
Additionally, the user experience in DeFi can be intimidating for new users who must simultaneously familiarize themselves with various concepts, including starting sentences And gas fees. Proper education is crucial to ensure a smooth experience for these users.
Financial literacy is also essential for one’s own protection, especially for the underbanked population, because World Economic Forum 2021 Report indicates that countries like Vietnam, the Philippines, Cambodia and Thailand have financial literacy rates below 30%. DeFi users have access to complex financial products like options or futures trading, which require responsible use to avoid excessive debt accumulation.
Regulating the DeFi space could be a solution to provide more clarity and protect users of this technology. Currently, there is no global regulatory framework for DeFi, and only a few countries, like Hong Kong, expressed their intention to regulate space. Regulatory measures can help build trust in the DeFi sector, providing users with peace of mind when engaging in this innovative technology.
Leading DeFi Companies in Southeast Asia
Although these challenges still exist, venture capitalists continue to show strong interest in this area. Crypto, blockchain and Web3 startups in the region have received significant funding in recent years, with almost a billion dollars in the first six months of 2022 on its own, demonstrating strong investor support and confidence in the potential of the region’s crypto industry.
Additionally, the region’s generally favorable regulatory environment towards cryptocurrencies is likely to attract a larger influx of cryptocurrency startups, enticing them to establish their headquarters in Southeast Asia. Many startups have already recognized the potential of the region and established themselves there, actively contributing to innovation and adoption in the industry.
Vietnamese blockchain game development company Sky Mavis has played a pivotal role in defining the play-to-earn genre with its blockchain-based game.Axie Infinite.”. With over 300,000 daily active users At its peak, the game achieved notable milestones such as the launch of its Ethereum sidechain, Ronin, to reduce transaction fees. “Axie Infinity: Origins», a mobile card game, was also released on the Apple App Store in May 2023 for certain countries, further improving the accessibility of the game.
DetroitXa Singaporean fintech company under Fazz, issues XSGD and XIDR stablecoins which can be used for various DeFi applications including lending and liquidity mining. Users can deposit SGD or IDR on the platform and receive the stablecoins in a 1:1 ratio. These stablecoins are available on four crypto networks, including the Polygon network, where transaction fees are significantly low – an average of three to ten cents in USD.
Blue Jay Finance aims to connect small businesses in need of loans with investors seeking interest on their stablecoin holdings in Southeast Asia. By increasing accessibility to these opportunities, Bluejay provides individuals with the ability to lend their funds to businesses that typically offer higher interest rates but require significant capital.
Finally, Piece98, a Vietnam-based blockchain startup, offers a suite of DeFi tools, including cross-chain token swaps, a token allocation checker, and multi-send functionality in a multi-chain decentralized wallet. Notably, the platform offers multilingual support including Vietnamese, Bahasa Indonesia, Chinese and Thai, allowing it to gain ground in Vietnam and Indonesia.
As the region continues to overcome obstacles and capitalize on the opportunities presented by DeFi, it has the potential to leverage this transformative technology to benefit the population, particularly those currently unbanked. With ongoing developments and the collective efforts of stakeholders, Southeast Asia can pave the way for a thriving DeFi ecosystem.