The Implication of Defi (Decentralized Finance) in Disrupting the Global Banking System

Decentralized finance (DeFi) has emerged as a credible challenger in the financial industry's current norms. It employs cutting-edge solutions to decentralize banking and industry concepts and provide financial services to anybody, everywhere. It also intends to improve financial inclusion by transforming lending and borrowing. However, no study has thoroughly demonstrated how DeFi is upsetting the whole financial system, or how the system as a whole may adjust to this unavoidable evolutionary condition. We attempted to summarize the situation by evaluating some critical documents, including quality working papers, opinion articles, reports, and research papers. Our findings suggest that DeFi could effectively replace banks which function as a middleman for all transactions, if the traditional system of banking is not changed, If people do not deposit their money at banks, banks may be wiped out. To deal with the system, central banks are using CBDC (Central Bank Digital Currency), which is supposed to make monetary policy more effective. The CBDC, which is account-based and bears interest, can serve as a store of value, medium of exchange, and stable unit of account. Although, CBDC can reduce the deposits, and market share of small banks. Overall, this manuscript hopes to give insight to researchers, policy-makers, bankers, and finance practitioners to understand the disruption effectively and take necessary adapting policies