In November 2022, in the weeks following FTX’s collapse, Harvard University Professor Kenneth Rogoff argued that the end of crypto was in sight. “It is hard to see how crypto could compete with more efficient financial intermediation options,” he wrote at the time.
Less than a year later, PayPal has launched its own digital currency. Another heavyweight, VISA, had similar plans before opting to increasingly use Circle’s USDC. In the same vein, some of the largest and best-known institutional names on Wall Street and beyond have entered decentralized finance, with BlackRock, Schroders, Fidelity International, Goldman Sachs and Abrdn among those that have made significant and strategic moves into crypto through investment products, collective offerings and mergers and acquisitions.
This move into DeFi by blue-chip institutional firms has shown that digital assets and the technologies on which they are built, can and are being considered as a new asset class by institutional investors and money managers (even if sold in exchange-traded funds and trust structures of old). And secondly, these types of companies see market opportunities to utilize the technology and infrastructure either in their offering or as an investment opportunity to profit from. Further, this institutional shift reflects a change in opinion, particularly from notable people such as Larry Fink, the CEO of BlackRock.
Beneath these moves are varying motives and aims. Some are commercial, such as servicing client needs in-house and earning fees for doing so. For others, it’s about technology usage, asset class exposure and a new digital economy in Web3 that is yet to materialize. Yet for some, it is about retaining centralized power, influence and control over a new international financial system.
That power isn’t necessarily a bad thing. Large institutional investors bring capital, expertise, research and development, structure, and professional standards to a DeFi system that, from philosophical design to practical implementation, hasn’t had that, and that has come at reputational and financial cost. However, traditional finance may need to move with caution, too, as on either side could be reactions against the move by those with something to lose.
For instance, the large projects in the digital asset world — like ETH, XRP, USDT and ADA — alongside the largest centralized exchanges have been what many interact with within the sector, but this ignores projects tied to commodities, particular countries, biometrics (WorldPay), health, supply chains and trade. So, while a fixation on Bitcoin can make sense, it is also fairly primitive. From a TradFi perspective, it remains to be seen how they will interact with the many subsections of DeFi, good or bad.
Crypto projects, venture capital firms, mentions by Elon Musk, and centralized exchanges have played a part in financing and promoting projects that otherwise would not receive interest from traditional finance, which can be slow and exclusionary in resource allocation beyond the expected routes. The quality and stability of decentralized finance projects are sometimes questionable, but TradFi is not without its own self-created issues — 2000, 2008 and LIBOR, anyone?
TradeFi’s move into DeFi clearly brings benefits and positive spillover effects, most notably in investment, volume trading, wider usage, professionalism and reliability. The International Monetary Fund, for its part, has asserted that TradFi and DeFi “must work together” — which makes sense. But the question of, in whose interests it would serve, is more opaque. If it’s for investors, economic development and unlocking new asset classes with both digital and real-world impact, then great.
Either way, DeFi firms will have to up their game and their remit, and look at offering services traditionally considered to belong to TradeFi. In addition, people should become more conscious about who owns and controls the technical and physical infrastructure that underpins the industry.
As someone who has worked in both TradeFi and DeFi, stronger relations and opportunities to work and innovate side-by-side should be welcomed — competition is natural and innovation is needed, yet anything else would suggest conflicting forces ahead. One thing TradFi’s firms likely haven’t considered is that DeFi may well enter their remit in an act of DeFi-TradFi normalization and that in a new digital and industrial revolution, DeFi is advantaged by being the upstart, not the incumbent.
As far as institutional investor acceptance and asset development, this is arguably an interesting moment being enacted by the biggest names out there, yet calling it a “pivotal moment” seems hasty as the digital asset industry remains in a state of recovery and change. And a weakened DeFi industry is more vulnerable, so TradFi’s moves could be strategically timed and less circumstantial.
Ultimately, let’s hope that TradeFi and DeFi achieve a level of cooperation, co-investment, and vision that improves things for all involved.