Decentralization of Finance is the latest buzzword in the world of Finance. It means the shift from local or regional banks to a system of flexible relationships and interconnectivity through the use of technology. The biggest beneficiaries of this evolution are consumers who are better protected by using their money in more places, at lower rates. The new trend in Finance has led to the gradual demarcation of financial activity into two major categories. Financial inclusion and Financial Disparity.
The Financial Inclusion concept means more than just the ability to get a loan or credit. The Financial Inclusion model also involves the knowledge, skill, and experience of the financial user to the extent that he is able to access markets at his level of efficiency and effectiveness. On the other hand, Financial disparity is defined as the difference between actual financial resources and potential financial resources. This divide between potential and actual helps to ensure that the Financial Inclusion model does not simply result in financial exclusion of some segment of society, while at the same time denying other segments the right to access the mainstream financial instruments at their level of efficiency and effectiveness. Financial disparity also helps to avoid the pitfalls that can trap any individual or company in a vicious cycle of inefficient financial management.
Today, the concept of Financial Inclusion has taken the shape of the Financial Service Task Force (FSTF), which is an interdisciplinary body set up by the US Federal Reserve. The FSTF brings together the financial experts from across the financial services sector, academia, and the business community to ensure a steady stream of advice and assistance to the government on matters related to monetary policy, financial stability, and economic growth. The mission of the FSTF is to provide timely and meaningful assistance to the Federal Reserve, the central banking system, and the US economy as a whole. The mission is to help make sure that sound money is available to supply the demands of the domestic and international economy. The Financial Service Task Force is part of the broader efforts of the Federal Reserve to strengthen the economy and help it grow.
The movement of money provides the bulk of the power in our financial markets. Without money, there cannot be any true market mechanism for trading. The need for efficient liquidity has driven a number of changes in the way we do finance. Central banks have traditionally had a hand in the process of financing the economy. However, with the decline in their ability to do so due to the global credit crunch, the turn of the tide has been toward more distributed forms of financial activity-and this includes the move away from the central bank to self-regulating and market-based forms of liquidity.
Asset backed securities (ABS) are just one of the more important means of achieving financial stability through the efficient use of financial instruments. A number of companies in the financial markets have already begun to use these models to provide them with a better chance of getting access to funding. The asset-backed securities are those that rely on asset values that are collateralized against the corresponding liabilities (e.g., bank loans and mortgages). The assets backing the securities typically come from a number of sources: government or central bank; corporate assets; gold, silver, art, gems, and other precious metals; and possibly even real estate, depending upon the type of model used. The system works like this: There is a pool of money, usually held by banks, which is used to make loans against the securities. When a borrower defaults on a loan, the bank can sell the security, making a profit off of the sale in order to cover its loan.
Another area in which the evolution of financial markets has occurred is in the realm of interest rates and the regulation of financial institutions. In the past, central banks have tried to manipulate the rate of interest they charge against their currencies. For instance, in the Great Depression, the US Federal Reserve set interest rates too low and caused a great contraction in the economy. Central banks are generally responsible for the management of their currency portfolios. The ability of central banks to influence the value of the currencies they own is what gave rise to the term “neoclassical economics”.
Financial development through the utilization of credit has always been an interesting topic, and it only seems natural that it would also be a source of contention among governments and banks. It has always been a contentious subject because credit has such a large impact on the overall economies of countries. Governments generally want to encourage financial development and growth. On the other hand, they are wary of the inherent dangers of credit. As such, they often attempt to implement policies that will help to limit or eliminate the use of credit in the financial sector. How decentralized finance can pave the way for financial innovation.
Overall, how decentralized finance can pave the way for financial innovation is not clear. It is difficult to make general statements about how a given economy will affect the evolution of the finance industry. What is clear is that such innovations do tend to bring about significant changes in the overall architecture of the financial markets. It is worth bearing this in mind the next time you hear the term “finance industry”.