Business Maverick

Business Maverick

Ultimate disruption lies in ‘DeFi-ing’ traditional banking model

Illustrative image | sources: First National Bank (FNB) branch in Johannesburg, South Africa, (Photo: Nadine Hutton/Bloomberg via Getty Images) / Nedbank ATMS (Photo by Gallo Images/ Papi Moake) / Absa Bank (Photo: Gallo Images/Fani Mahuntsi) / Standard Bank (Photo: Gallo Images/Papi Morake)

The traditional banking model remains dominant, but for the first time, it faces a real threat of disruption from multiple directions: newcomers, low-interest rates, internet startups, and many more. Now there is a new threat from a totally left-field participant: cryptocurrency. 

The interest rates offered by some of the country’s larger banks on various savings products and other money market accounts roughly range anything between 1% and 4% per annum. The SA Reserve Bank key repo rate is currently 3.5%, which means the prime rate that affects consumers is 7% – South Africa’s lowest rate since 1966. And rates are likely to remain subdued for some time.

So cash in the bank means little to nothing for fixed income earners or investors at present. There is some upside for property owners with a mortgage at the bank, however, with lower monthly instalments due. But what if there were something better on either side?

South African-founded cryptocurrency exchange Luno launched a savings wallet feature earlier this year, which allows users to earn up to 4% interest per annum on bitcoin holdings. AltCoinTrader is doing the same thing, and recently had a soft launch of a similar feature. Founding member Richard de Sousa says the official launch is imminent.

The new feature allows both AltCoin and Luno users with bitcoin and some other crypto assets like ethereum to “earn passive income” on the value of their balance in their respective crypto wallets.

There are no fixed terms and no admin fees, and users are able to move their funds into their ordinary crypto wallet whenever they require it.

Marcus Swanepoel, CEO and co-founder of Luno, told Ventureburn that “in a time of economic uncertainty, the Bitcoin savings wallet is an alternative for anyone looking to get meaningful savings on their money.

Almost 95% of our customers have said they want to earn interest on their Bitcoin, and because of the nature of Bitcoin, we are able to offer a much higher interest rate than traditional savings accounts in certain regions (Europe, for example) and comparable to flexible interest offerings in emerging markets such as South Africa.

“As traditional investments have shown vulnerability at a time of crisis during 2020, there has never been a better time to benefit from a currency that does not rely on a healthy economy to determine its value.”

But there is another side to this story that should have the banks very worried indeed.

De Sousa recently purchased a property on the West Rand priced at R650,000 for only R200,000, by using, which offers crypto-based financial services, including loans.

There are several apps out there that operate on what is known as the DeFi network. According to DeFi Pulse, close to $20-billion is tied up in these applications across the world. Apart from Oasis, other well-known options include Compound, Aave and Maker. De Sousa has taken loans on all of them.

He decided to borrow the money for this recent property purchase from Oasis using some of his stash of ethereum as collateral. When De Sousa took out the loan, the interest rate was a mere 2%.

“This is a mortgage lending model that could not only disrupt but also destroy the traditional model, and the banking institutions’ hold on the market,” he says.

De Sousa’s loan was based on a blockchain smart contract, where certain conditions had to be met before collateral could be called in. De Sousa had to transfer about R1-million ethereum into an Oasis vault to cover a loan of R650,000.

Should the ethereum price have dropped below R650,000, the “smart contract” would have automatically liquidated his balance, and deducted a 13% liquidation fee plus the loan amount, and refunded him the balance.

De Sousa retained custody of the coins for the duration of the loan. Only the smart contract had the right to call on his collateral.

The loan was made in a cryptocurrency called dai, which is backed 1:1 by the US dollar. De Sousa moved the dai to the AltCoinTrader platform, sold it for local currency and made an extra 4% to 5% on this exchange rate leg of the transaction.

With the dai now converted into rand, De Sousa transferred R650,000 to the house seller’s attorneys, and the deal was done.

The best part of this story is that De Sousa was under no obligation to make monthly instalments on the loan, and could even have ignored things for the next 20 years if he wanted to.

“The only risk I faced was that ethereum’s price would drop below 66% of [the] collateral requirement,” De Sousa says, “but one way to [prevent] this from happening is to top up my margin call with more ethereum should there be a severe price drop.”

But De Sousa decided to settle his loan in full when his crypto balance jumped significantly in value and paid only one-third of the asking price (R200,000).

“The house is now tenanted and earns a monthly income,” he adds. “I did all of this completely outside of the banking system, which is fraught with risks and hidden costs,” he says.

“You miss a couple of mortgage payments and the banks have the right to evict you and sell your house at auction, or add interest or other penalties to your balance for tardy payments. Not to mention the fee most banks charge for settling a bond early. This way I avoided the banks altogether, and all that jazz.”

This type of loan arrangement also doesn’t require the tedious Know Your Customer routine. Monica Singer, South African lead for the global Ethereum Enterprise ConsenSys, says they are building similar solutions. “We want to create a real world asset using real estate as collateral for a token that gets traded in the DeFi world.” This is innovation, she says. This is disruption.

Regulation will be an important catalyst for broader cryptocurrency adoption in South Africa. The Financial Sector Conduct Authority recently announced a draft declaration of crypto assets as a financial product, which effectively means that any entity or person who renders intermediary services in relation to crypto assets must be an authorised financial services provider.

This is a mortgage lending model that could not only disrupt but also destroy the banking institutions’ hold on the market. BM/DM


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