Traditional finance is careful about Decentralized finance, but there are chances to work together.
Summary
Traditional finance institutions are increasingly interested in crypto and its technological solutions, believing their involvement could drive growth and adoption. As DeFi and crypto drive economic transformation, they must coexist. DeFi must prioritize compliance, pursue strategic partnerships, and integrate innovative tools. TradFi’s involvement in crypto developments is predominantly through digital-first banks or experimental blockchain pilot programs. However, the decentralized nature of blockchain-based platforms, uncertainty, and privacy concerns hinder progress. DeFi must bridge the gap between these ecosystems to benefit from cooperation.
Traditional finance (TradFi) institutions moved from criticism to interest in crypto and its technological and financial solutions, fostering faith that their involvement in the industry could drive growth and widespread adoption. As crypto and decentralized finance (DeFi) drive an economic transformation, it is inevitable that competing realities will coexist.
A cost-effective alternative
After many tragedies, the banking system is no longer blindly trusted by the general public. The financial freedom that DeFi and crypto advocate for offers a more cost-effective and efficient alternative. However, TradFi, the driving force behind our economic system, is responsible for safeguarding the financial environment by establishing regulations that safeguard both businesses and individuals. TradFi will continue to be a component of the equation, even if digital assets and blockchain become the primary payment rail and value movements.
It is difficult to ignore the fact that TradFi’s function remains minimal as DeFi and tokenized real-world assets (RWAs) continue to captivate the attention of banks and asset managers. In order to ensure conformance with legal frameworks, DeFi must prioritize compliance, pursue strategic partnerships, and integrate innovative tools when onboarding additional institutions.
Is it possible for DeFi and TradFi to coexist?
Although many crypto enthusiasts and decentralization purists will not be fond of the notion of TradFi’s involvement in their domain, it is widely recognized that institutions offer regulatory and risk management expertise, credibility, liquidity, and more. DeFi’s maturation has allowed it to leverage TradFi’s experience and transcend ideological barriers to further solidify its position in a changing financial environment.
TradFi’s involvement in crypto developments is predominantly through digital-first banks or experimental blockchain pilot programs, such as SWIFT, despite the fact that some major institutions issue tokenized treasuries and bonds. Of course, there are plenty of spot Bitcoin exchange-traded funds but these developments tend to follow the crypto ecosystem rather than actively participating.
What is impeding the progress of institutions?
The decentralized nature of blockchain-based platforms, which is characterized by transparency and opt-in compliance, maintains a distance between institutions. Uncertain regulations that can significantly differ from region to region, in addition to privacy concerns, increase the gap between DeFi and TradFi.
In spite of the increasing prevalence of regulatory processes such as Know Your Customer (KYC) among DeFi platforms, the interaction with public blockchains, where the majority of liquidity is located, presents carefully compliant institutions with an excessive number of uncertainties.
Banks are capable of managing risk due to its quantifiable and actionable nature. Nevertheless, uncertainty in finance pertains to unknown future results. The inherent volatility of crypto and DeFi means that institutions that are known for risk mitigation lack the necessary data to take calculated risks. DeFi must first clear house in order to bridge the distance between these similar yet immensely different ecosystems, as both parties stand to benefit from cooperating and engaging with one another.
Also Read: Ethena Sets 2025 Vision with Telegram Payments and TradFi Adoption:
Ethena Labs has announced its 2025 roadmap, which includes a savings and payment app on Telegram using its sUSDe stablecoin. The app will interface with Apple Pay and compete with Tether by transitioning from a single-asset issuer to Ethena Network, a blockchain platform for financial innovation. Ethena plans to collaborate with conventional financial institutions and increase its native token, ENA…[Read More]
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