You’ve probably heard of decentralized finance (DeFi) by now — a revolution that has been reshaping the financial landscape around the globe by providing an alternative, decentralized approach to traditional financial systems. Southeast Asia stands to be one of the regions most significantly impacted by this transformative wave due to its growing tech-savvy population.
However, while the future of a decentralized world is promising, do any barriers exist that hinder the widespread adoption of this technology? In this article, we delve into how DeFi could benefit the region, along with the associated risks that stakeholders need to navigate.
What is DeFi?
DeFi leverages the blockchain to democratize financial transactions, enabling 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 whenever a user performs a token swap.
To interact with this technology, a user just needs to download a non-custodial wallet, which can be likened to a digital personal safe deposit box that is stored on the blockchain. Users can download wallets like MetaMask, Trust Wallet, or many others and deposit funds into them. This allows users with crypto wallets to gain access to a wide range of decentralized applications.
Southeast Asian nations — including Vietnam, the Philippines, Thailand, and Indonesia — have already demonstrated their willingness to embrace technological advancements. These countries all rank within the top twenty of the 2022 Chainalysis Global Crypto Adoption Index, further emphasizing the region’s readiness to harness the benefits of DeFi.
Why is DeFi needed in Southeast Asia?
Although Southeast Asia has emerged as one of the fastest-growing regions in the world, more than 70% of the adult population is either underbanked or unbanked — meaning they have limited access to financial services.
While initiatives like Buy Now, Pay Later (BNPL) have emerged to address this issue, DeFi holds the potential to offer a comprehensive suite of financial services tailored to this underserved population.
In countries like the Philippines, one of the hurdles faced by this population in accessing traditional financial services stems from the absence of a reliable personal identification system. Due to difficulties in passing a law for a countrywide identification system, the Philippine Identification System (PhilSys) was only implemented in 2018, and it has been plagued by encoding errors and an influx of fictitious names. This makes it difficult for banks and businesses to verify the customer’s identity before providing financial services to them.
Moreover, a study conducted by Google, Temasek and Bain & Company in 2019 highlighted the lack of reliable traditional data like tax filing and formal employment documentation in Southeast Asian countries outside of Singapore. This hampers consumers’ ability to gain access to credit or demonstrate their creditworthiness.
Decentralized financial services provide an alternative solution that is entirely non-custodial. Unlike traditional services, decentralized wallets do not require any know-your-customer (KYC) verification, allowing anyone to gain access to financial services like lending and borrowing regardless of their financial standing.
Another challenge in the region is limited interoperability in payment systems between countries in Southeast Asia. The region is home to many labor migrants, who leave their home countries to seek employment opportunities in other parts of the region. As a result, they require a reliable way to send funds to their loved ones at home.
Compounding this challenge is the absence of a standardized currency across all Southeast Asian countries. When these migrant workers send money back home, they often encounter the need for currency conversions. This process typically involves engaging with financial institutions to convert their earnings into the local currency of their families. Unfortunately, this currency conversion process often comes with high fees and unfavorable exchange rates, further burdening the individuals sending money to their loved ones.
While Southeast Asian countries have committed to establishing a cross-border payment system in the near future, the blockchain serves as a compelling alternative for such payments. The existing remittance providers may charge high fees, where it was reported by the Asia Regional Integration Center that the average cost of sending USD 200 in cash in Southeast Asia was slightly over 6% in 2018 — a significant amount for many.
The blockchain serves as a more cost-effective way to transfer funds across countries. Typically, most blockchains require you to pay a transaction fee, which is determined by the network’s congestion and remains the same regardless of the transaction amount. Consequently, when sending a substantial sum of money, it can effectively mitigate costs associated with the transaction.
Moreover, some decentralized applications offer a multi-send feature that enables users to send funds to multiple wallets in a single transaction. This functionality not only simplifies the process of fund transfers but also enables 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 certain barriers that hinder the widespread adoption of this technology.
Southeast Asia is a linguistically diverse region, with each country having a distinct national language. While some decentralized applications like PancakeSwap offer multi-language support like Bahasa Indonesia, Filipino, and Tiếng Việt, this feature is not commonly found across other platforms.
Moreover, the user experience in DeFi can be daunting for new users who need to familiarize themselves with various concepts simultaneously, including seed phrases and gas fees. Adequate education is crucial to ensure a seamless experience for these users.
Financial literacy is also essential for one’s own protection, particularly for the underbanked population, as the World Economic Forum’s 2021 report indicates that countries like Vietnam, the Philippines, Cambodia, and Thailand have financial literacy rates of less than 30%. DeFi users gain access to complex financial products like options or futures trading, which require responsible usage to prevent 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, have expressed intentions to regulate the space. Regulatory measures can help establish trust in the DeFi sector, offering users peace of mind as they engage with this innovative technology.
Prominent DeFi companies in Southeast Asia
While these challenges still exist, venture capitalists still exhibit a keen interest in the space. Crypto, blockchain and Web3 startups in the region have received significant funding over the past few years, with almost USD 1 billion in the first six months of 2022 alone, demonstrating the robust support and confidence that investors have in the potential of the region’s crypto industry.
Additionally, the region’s generally favorable regulatory environment towards cryptocurrencies is likely to attract a greater influx of crypto startups, prompting them to establish their headquarters in Southeast Asia. Already, many startups have recognized the potential of the region and have set up operations there, actively contributing to innovation and adoption in the industry.
Vietnamese-based blockchain game development company Sky Mavis has played a pivotal role in defining the play-to-earn genre with its blockchain-based game “Axie Infinity.”. With over 300,000 daily active users at its peak, the game has 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 select countries, further enhancing the accessibility of the game.
StraitsX, a Singaporean fintech company under Fazz, issues XSGD and XIDR stablecoins that can be utilized for various DeFi applications, including lending and liquidity mining. Users can deposit SGD or IDR to the platform and receive the stablecoins in a 1:1 ratio. These stablecoins are available on four crypto networks, most notably the Polygon network, where transaction fees are significantly low — an average of three to ten cents in USD.
Bluejay Finance aims to connect small businesses in need of loans with investors seeking interest on their Southeast Asian stablecoin holdings. By increasing accessibility to these opportunities, Bluejay provides an avenue for individuals to lend their funds to businesses that typically offer higher interest rates but require significant capital.
Finally, Coin98, a Vietnamese-based blockchain startup, offers a suite of DeFi tools, including cross-chain token swaps, a token allowance checker, and a multi-send feature within a multi-chain decentralized wallet. Notably, the platform offers multi-language support, including Vietnamese, Bahasa Indonesia, Chinese, and Thai, allowing it to gain significant traction in Vietnam and Indonesia.
As the region continues to address the barriers and capitalize on the opportunities presented by DeFi, it has the potential to leverage this transformative technology to benefit the population, particularly those who are currently unbanked. With ongoing developments and the collective efforts of stakeholders, Southeast Asia can pave the way for a thriving DeFi ecosystem.