DECENTRALIZED FINANCE, COVID 19 PANDEMIC AND THEIR IMPACT ON GLOBAL FINANCE AND POLITICS.
- escape00
- Feb 12, 2021
- 17 min read
1.0 INTRODUCTION
Humans since the inception of time had always wanted life easy and simple. From the innovative acts of creating fire by the early men, down to the wonders of technological breakthroughs of the modern days, we can conclude that mankind has come a long way to simplify existence. Although mankind has done so much good and performs great deeds in life, she has also been slowed down by numerous obstacles like conflict resulting for scarce resources to disease and pestilence, cultural and social differences, and many more. These factors have in many ways shaped the evolution of mankind both positively and vice versa. Despite these setbacks, mankind has in one way find solutions to tackle these negative factors and move on with the simplification of life.
The intellectual evolution of mankind has helped coming generations understand the ways in which mankind throughout history has survived great challenges and overcome setback as well as transforming these various setbacks into an advantageous socio-economic or political trend. The last two centuries of mankind has seen it all; from global and regional wars, numerous outbreaks of diseases, socio-cultural changes, political formations, technological advancement, global human right establishments and many more. We can deduce that with all this, mankind has struggled to make not so pleasant situation become a commonality and this feat is achieved through various means like cooperation “finding a common ground”, use of technology and so on.
In the past two-decade mankind has been faced with yet another setback such as global economic recession, regional wars and outbreak of diseases. But she has been able to resolve these setbacks through cooperation and technology. Recently, the world was hit hard by the Covid_19 pandemic which has seemed to hold mankind at its throat and squeeze harder and harder making all sphere of human life seems so difficult and unyielding. However, if there is one thing learnt from history it is the fact that humans have been able to overcome the setback in a very spectacular fashion. Also, the last decade has seen the evolution in the human mode of finance with the simplification of the internet from it being an instrument for top government or private companies to a global necessity for all mankind. The creation of the internet in 1983 was meant for only military purposed, however, today we can see the importance of internet in the everyday livelihood of mankind from the sphere of politics, economic and even social. Thus, it is this integration of the internet into all spheres of human life that has opened the debate for how the world would evolve in the next decades to come.
Covid_19 pandemic has disrupted the flow of human existence in all sphere of life and currently it is looking like mankind would have to blend with the aftermath of the pandemic like she has done in previous situations. In other to integrate the society into the Post-Covid_19 world, it is important that mankind harness the power of technology once again, the use of the internet and other associates like robotics and in the case of finance or economic; decentralized finance.
This paper would take a look at the various manners at which technology can shape the course of human existence in the Post-Covid_19 world as well as the global interaction both economically and politically. First, we will establish some concepts that would allow us to understand the component of this discussion and then there will be an overview of how the world might be structured in the Post-Covid_19 world, also with some personal recommendations.
2.0 CONCEPTUALIZATION
With the growing population concern of the world, it is paramount for mankind to find a way to govern themselves and conduct trade amongst themselves in other to sustain the existence of human. The question of how can we govern ourselves better? What should be the main general acceptable ideology of governance? How do we conduct trade? How do we structure global trade in other to achieve global trade equilibrium? Have all been the centre for intellectual debates and discussions for the past century. However, to fully comprehend these questions, in this section we shall discuss concepts like centralized and decentralized finance, Covid_19 pandemic, globalization and liberalization.
First, in simple term, a process where financial services orders (buying and selling) are channelled through a single exchange body or unit with the target of improving fair trade, increase buying and selling as well as fostering more transactions is called Centralized Finance (CEFI). In this type of financial model, the price benchmark proposed by the central body exchange is to be used by the trader and this price quota has no other alternatives. Here, the central body is tasked with functions ranging from; Strategic budget development; Investments, cash management & banking; Debt management; Real estate management; Institutional financial accounting; Sponsored project billings, collections, reporting; and Risk management & insurance among others. With this model of finance, there is a great deal of trust in the central body structure to effectively manage business services and fund professionally and legally. Some features of centralized finance include; centralized exchange where all trade transactions take place, a high degree of financial discipline, which accounts for a minimized risk of fund mishandling or expropriation and many more.
Decentralized finance (DEFI) as its name implies conduct financial transaction with the omission of a central body. Unlike the Centralized Finance where there is a regulatory body like the banks, brokerage or an exchange platform that oversees the financial process, Decentralized finance works by using applications that execute financial tasks on digital ledgers called blockchain these applications are called DApps. The Blockchain otherwise refers to as Distributed Ledger Technology (DLT) can be defined as a technology that records the origin of a digital asset. In simplicity the technology of blockchain functions to eliminate the issue of mistrust and improve the sharing of valuable data in a secure, incorruptible manner in the financial process. The blockchain consist of three main elements; blocks, miners and nodes. These elements are responsible for the decentralization process of finance in such a way that no central body or computer, owns or control financial data or ledger. Although there is no central body to regulate, the financial transactions are visible on the blockchain by the public thus providing transparency. With Defi, individuals are able to manage their finance themselves and there is a great deal of transparency due to the openness of the blockchain platform thereby reducing the risk of fraud or funds mismanagement which mostly lead to a financial crisis as seen in the recent 2008 financial crisis.
Covid_19 pandemic according to the World Health Organization is “an infectious disease caused by a newly discovered coronavirus. Most people infected with the COVID-19 virus will experience mild to moderate respiratory illness and recover without requiring special treatment. Older people and those with underlying medical problems like cardiovascular disease, diabetes, chronic respiratory disease, and cancer are more likely to develop serious illness. The best way to prevent and slow down transmission is to be well informed about the COVID-19 virus, the disease it causes and how it spreads. Protect yourself and others from infection by washing your hands or using an alcohol-based rub frequently and not touching your face.”1
Currently in the world, according to WHO there has been a total reported case of 103million infected and 57.3million recoveries and 2.24million deaths2, making the pandemic on of the most devastating outbreak in human history siding with the likes of the Spanish flu of 1918, the influenza pandemic of 1957 to mention a few. And its effect on world order has been staggering spanning across all sphere (economics, political and socio-cultural).
Next, we will discuss the concept of globalization. Here, we will discuss the concept based on two aspects; globalization of economics vis-à-vis trade and globalization of politics. Joseph Stiglitz, a Nobel Prize-winning economist, in his book Globalization and its Discontents, saw the concept globalization as “… close integration of the countries and peoples of the world… brought about by the enormous reduction of costs of transportation and communication, and the breaking down of artificial barriers to the flows of goods, services, capital, knowledge and people across borders”.3
Also, according to the International Monetary Fund (IMF), Globalization is seen as “the process through which an increasingly free flow of ideas, people, goods, services, and capital leads to the integration of economies and societies”4.
However, in simpler term globalization can be seen as a worldwide fusion of human activities so as to achieve sustainable development, growth and stability. These activities might range from cultural practices, good and services, technology and even human (migration). Furthermore, to understand the globalization of trade, we need to see what trade itself means. According to the World Bank, “trade is an engine of growth that creates jobs, reduce poverty and increase economic opportunity”5. Thus, with this we can establish trade, in essence, is a catalyst for development. Hence, globalization of trade can be seen as an integration of the world economy in other to foster development within and amongst countries of the world. It indicates the quota of production that occurs beyond the border of a country. On the other hand, Political globalization can be seen as the increase in the relationship as well as the integration between countries of the world as it relates to political ideology, structure and composition. Also, we can see it as the growth of the international and regional system of government. These international systems of government serve as government of nation-states who are guided by the international laws and regulations. The United Nations or the European Union can be classified as examples of these international government. Thus, in retrospect, we can simply say political globalization is a “borderless government” that seems to serve as an inclusive body for all nation-states.
Finally, liberalization in simple terms refers to the slackening of government control or powers. However, it is important to note that the concept is mostly associated with economics or rather trade. Liberalization as it pertains to globalization in an economic sense can be seen as deregulation. Hence, we can say liberalization can be defined as the reduction or removal of state influence in business, trade and capital or economy in general. Thus, this concept promotes the emancipation of market from state intervention and an increase of individualism.
3.0 LITERATURE REVIEW
As the world integrate more through the influence of globalization with the machinery of liberalization and capitalism, mankind hasn’t seen this much growth in the global development of trade and production. According to Esteban O. et.al “Over the last couple of centuries, the world economy has experienced sustained positive economic growth, and over the same period, this process of economic growth has been accompanied by even faster growth in global trade”6. And these growths are evident as a result of global economic integration which is factorized by the existence of variables such as competition among firms with the advent of new technology and business/organizational models; economies of scale with firms that have the capabilities to export global goods in large scales as well as produce in large quantities to meet up with global supply and demand with the consideration of price per unit of product lowered; learning and innovation with firms adapting to new technologies and developing new and more advance industrial standards as well as gaining more experience and exposure from interaction with foreign market and competitors. Also, it is very important to notice the influence of international political bodies as it relates to human comfort. As we can see in the establishment of the United Nations Sustainability Development Goals in 2015 and these goals set to be achieved by 2030. Thus, according to European Union, these goals are set to be achieved through six key transformations which is; “substantial advancement through human capital, responsible consumption and production, decarbonization and energy, access to nutritional food and clean water, construction of smart cities and the digital revolution”7.
However, with the declaration of Covid_19 as a global pandemic in January 2020, the process of globalization has slowed drastically and this has further increased the uncertainty surrounding the achievement of sustainable development in the world particularly in the third world. Furthermore, its damaging effect on global finance and economy has opened many debates among intellectuals from many fields of study. As well as the question surrounding the future and credibility of Centralized finance and the scepticism surrounding the decentralized finance as they all relate to the aftermath of the pandemic and what the future holds for global trade and politics. Questions like; What is the future of the global finance model after the COVID_19 pandemic? What will be the future of the centralized economy in the nearest future? Are been asked and in this paper, we tend to provide reasonable answers.
3.1 POST-COVID_19 GLOBAL FINANCE
With Coronavirus running rampage on the global economy, it is safe to say that the post-covid_19 world will look a lot different in all spheres of human existence and co-existence. There has been a lot discussed the impact of the virus on global economy, politics and socio-cultural relations, however, to better understand how the post-covid_19 global interaction would look like we will briefly look at how covid_19 has impacted the world most especially in the area of Economics.
As Covid_19 virus shows zero respect for the national border, it decimates the economies of various nations with no regard to race, region or political ideology. The outbreak has created devastating economic effect particularly in the Third World or developing economies who were prior to the outbreak of the pandemic were struggling to match up the UN standard criteria for developed economies. Hence, the pandemic has raked havoc on these struggling economy as well as increase the level of extreme poverty in the world in general. And this can be confirmed by the statement published by the World bank on Oct 2020 asserting that; “The COVID-19 pandemic is estimated to push an additional 88 million to 115 million people into extreme poverty this year, with the total rising to as many as 150 million by 2021, depending on the severity of the economic contraction. Extreme poverty, defined as living on less than $1.90 a day, is likely to affect between 9.1% and 9.4% of the world’s population in 2020, according to the biennial Poverty and Shared Prosperity Report. This would represent a regression to the rate of 9.2% in 2017. Had the pandemic not convulsed the globe, the poverty rate was expected to drop to 7.9% in 2020”8. With this, we can deduce that this pandemic has further exposed the preexisting frailties of the global economic models and hampered global development around the globe as well as create a general sense of uncertainty.
Moreover, as the pandemic not only affect the political, social-cultural and economic sphere of the globe, this section will discuss how the world would shape up in the economic sphere in the future or rather the aftermath of the outbreak particularly on the aspect of finance. finance, as we know, is the act of providing funds for business activities, investing and making transactions. This process is central to economics as it is one of the major fuels that keeps the economic engine functioning. Thus, it is important for us to understand that as Covid_19 has slowed economic transactions and processes both globally, regionally and locally, it is paramount to identify its effect on the conduction of finance. First, as we have previously established, the world in general (most nation-state) adopt the centralized system of finance where there is a regulatory body that oversees the structure, composition and matrix of finance. This body is mostly called the central bank or the Federal Reserves (in the case of the United State), and this institution is set up by the state to perform financing functions like; oversees its money supply and create monetary policies, influence the interest rates and interfere in open market operations to command the cost of lending and borrowing all through the economy. Nevertheless, due to the outbreak, we have been able to see the weakness of this system with “benchmark interest rates have been slashed to near-zero and, in some cases, gone well into the negative zone”9, which can well result into a liquidity trap. Also, this can lead to lack of savings; when the interest rates are so low ordinary people who sometimes live off the interest on their savings will tend to invest their asset into other things like goods and services, which in turn result to banks losing the deposit. Also, “Large-scale asset purchases were also quickly initiated, with most central banks committed to quantitative easing (QE) for some time to come. This has swelled their balance sheets to levels that have never been breached before”10. And by engaging in this act, we can see the fact that there is panic due to the uncertainty of the future, as most central banks rush to stock up their balance sheet and in due time there might be a situation when central banks run out of valuable asset to buy. Adding to this is the fact that, “COVID-19 has impacted central banks through changes to the net income booked into their financial results, along with seigniorage”11.
Anyways, with these various impacts established we can see the weakness of a centralized financial system. According to Atzori, M. (2017), he highlighted in his article that “The blockchain technology potentially allows individuals and communities to redesign their interactions in politics, business and society at large, with an unprecedented process of disintermediation on large scale, based on automated and trustless transactions. This process might rapidly change even the tenets that underpin existing political systems and governance models, calling into question the traditional role of State and centralized institutions”12. Hence, it is essential to align to the fact that with the growing distrust in the traditional functions of the state as regards to finance, individual with the edging towards the idea of a decentralized blockchain-based service, which is an open-source platform (e.g., Bitcoin, Ethereum). Criticism has arisen against the traditional model of finance seeing it as too corrupt and slow, lacking in creativity and innovation, and benefiting too few (majorly the elites) as techno-libertarians tend to idealize that “we are at a stage in history when individuals can gradually overcome any centralized political institution through algorithm-based distributed consensus and create the conditions for an idealistic society of equals, characterized by flat, rather than hierarchical, structures”13. Also, the blockchain can function as a permanent public record archive to save all government legal documents such as passports, contracts, identification cards and so on in a more effective, efficient, cheaper and decentralized manner. This system of finance can as well function seamlessly across geographical boarder breaking a major constraint to a centralized economy based on the difference in currency exchange and rules guiding individual nation financial bodies, making it very adaptable to global transactions. For instance, one of the difficult financial circumstance of third world countries to get involved in the global trade and finance can be associated with the globally accepted Dollar standard for international trade which can be biased in many ways. With the introduction of the decentralized finance (Blockchain technology), there can be a level plain ground for all countries to conduct trade without the scare of exchange rate price. It is necessary for us to know that to decentralize finance through blockchain doesn’t totally cut out the state, however, it promotes a freer market economy. The blockchain is not an instrument for lawlessness and anarchy but its purpose is to prevent unrestrained control of market processes and to make the legal framework smoother.
Consequently, with the impact on the current system of finance (CEFI), it is logical to state that the post-Covid_19 global economy will most likely in the next decade see the world moving towards the direction of decentralized finance. More so, we can easily see that the state itself is noticing the evolution of the blockchain technology and there has been an effort by the state to adopt similar idea with the creation of the Central-Bank Digital Currency (CBDC) which “is the digital form of a country’s fiat currency that is also a claim on the central bank. Instead of printing money, the central bank issues electronic coins or account backed by the full faith and credit of the government”14. Besides, we should note that as the world economy (in this case; fiat currency) went on a downslope due to the pandemic, there was a substantial increase in the value of the decentralized currency (in this case the likes of Bitcoin and Ethereum). This is to show the level at which investors and individuals are starting to take charge of their finance giving the constant fall of the world economy due to the outbreak.
3.2 FUTURE OF CENTRALIZED FINANCE
Given the previous discussion, one might think that the centralized financial system will disappear with the emergence of decentralized finance. This assertion stands to be corrected as it would be very difficult, if not impossible to totally displace the centralized system of finance giving its own relevance and importance it has in today’s economy. Nevertheless, it is important that we acknowledge the fact that the current centralized financial system has reasonably adapted with the outbreak of the pandemic on a global level. As we can see in the World Economic Forum held in Dubai in 2019, it was stated in the white paper that “…they explored various drivers of the transformation of financial and monetary systems, including innovations in green finance and the payments and currency space. They also conducted an exercise to identify risks to the global financial system...”15. Still, we can say that the response of the centralized financial system was slow to the pandemic making market processes be on a coma for some time. Although there was some element of market been integrated technologically, however, these processes were all in their infant stages and could do little to reduce the impact of the pandemic, as it was stated in the white paper that “In many ways, the pandemic accelerated trends that were already underway before the crisis but that were slower in adoption. This includes digitization, but also the need for sustainable resilient business models and laying bare the inequities in our societies and the need for the financial sector to further support inclusion…”16.
Hence, various strategies to further improve the centralized finance can allow for a coexistence between centralized and Decentralized financial system in the decades to come. As, there has been an effort to allow the centralized system more accommodating, collaborative and more technologically advanced as it was recommended that the system should be allowed to “Drive partnership across the private sector to build tools and services that best serve evolving customer needs…. Foster collaboration between the public and private sectors to speed the pace of recovery… Democratize access to technology tools and services”17. There was also the proposal of a digital ID which will serve as an individual or entity legal identity which will allow such individual or entity to participate in the mainline economy and avoid exploitation. The concept of centralized data and decentralized authority has also been considered in this case the Central-Bank Digital Currency (CBDC) which is a form of Decentralize finance.
Therefore, to conclude on the future of the centralized economy, objectively, I personally think that in the next three decade there will be a substantial share of the financial space between an advocate for the “new centralized finance” and the “Decentralized finance”.
4.0 RESEARCH METHODOLOGY
In this paper, we shall be using critical theory views to discuss the impact of Covid_19 pandemic on the global finance as well as the reality surrounding the traditional finance model (Centralized Finance). We will be making use of Books, Journals, articles and standard website writings backed with empirical data to dissect the topic. Cases used in the paper will be mainstream cutting across all nations.
The research will provide critical answers to questions below;
a. What is the future of the global finance model after the COVID_19 pandemic?
b. What will be the future of the centralized economy in the nearest future?
5.0 IMPLICATIONS
The paper tends to highlight the impact of Covid_19 pandemic on global finance and how the current financial system has failed to adapt quickly to the outbreak and thereby preventing its massive impact on the global economy. However, also in the paper, we highlighted the possible alternative to the traditional financial system and how it can help integrate a more fluid and accommodating financial system while preventing individual or entities for the effect of an outbreak or crisis on their finance.
Moreover, it will be rigid to say that decentralized finance is the almighty saviour coming to save all mankind from the effect of pandemics or crisis. Decentralized finance or blockchain technology has some downside to it as well; for instance, one can say despite its open-source characteristics and egalitarian peer to peer network, blockchain technology without a public body or institution to regulate the actions within the system might lead to a new oligarchy and polarized society. Additionally, one can argue that there is already an aptness of centralization or elitism in the current Bitcoin or other cryptocurrency networks, this can be seen in the statement mentioned by Atzori, M. when he said “In theory, the open-source protocol is designed to foster cooperation on a global scale and anyone can contribute to code development through an online forum (github.com). In practice, however, decisions are executed by a small number of core developers and they constitute a governance group with the exclusive power to accept submissions”18. With this we can say that despite the outward proclamation of openness the system can still be questioned based on the availability of the technical knowhow to execute these functions that allow individuals or entities to get involved in the intricate aspect of blockchain technology, making the so-called “core developers” retain the majority of the control. On this account, “All these elements confirm that the revolutionary potential of governance- by- network as an absolute, perfectly horizontal mode of political and social organization is often overstated and unrealistic”19.
Conclusively, since it is evidence that the struggle for the global establishment by the advocate of decentralized finance and the sustenance of the already established centralized finance all depend on the fashion of how Covid_19 reshapes the world which will be achieved through governmental policies and regulations, it is logical to conclude that we will revert to the issue of selection of qualified leaders through a legitimate process, transparency and accountable procedure to limit their powers.
REFERENCES
3. Joseph Stiglitz 2002; Globalization and its Discontents. Published by W. W. Norton & Company Inc, 500 Fifth Avenue, New York, New York 10110.
6. Esteban Ortiz-Ospina and Diana Beltekian (2014) Trade and Globalization. The article was first published in 2014; last revised in October 2018. https://ourworldindata.org/trade-and-globalization
12. Atzori, M. (2017). Blockchain Technology and Decentralized Governance: is the State Still Necessary? Journal of Governance and Regulation, 6(1), 45-62.
13. Atzori, M. (2017). Blockchain Technology and Decentralized Governance: is the State Still Necessary? Journal of Governance and Regulation, 6(1), 45-62.
14. https://www.atlanticcouncil.org/blogs/econographics/the-rise-of-central-bank-digital-currencies/
15. World Economic Forum (2020). The post-covid_19 Financial System; Global Future Council on Financial and Monetary system. White Paper October 2020. Held in Dubai November 2019.
16. World Economic Forum; The post-covid_19 Financial System; Global Future Council on Financial and Monetary system. White Paper October 2020. Held in Dubai November 2019.
17. World Economic Forum; The post-covid_19 Financial System; Global Future Council on Financial and Monetary system. White Paper October 2020. Held in Dubai November 2019.
18. Atzori, M. (2017). Blockchain Technology and Decentralized Governance: is the State Still Necessary? Journal of Governance and Regulation, 6(1), 45-62.
19. Atzori, M. (2017). Blockchain Technology and Decentralized Governance: is the State Still Necessary? Journal of Governance and Regulation, 6(1), 45-62.
Comentários