Crypto Experts Map Way To Bridge TradFi, DeFi (Cryptocurrency: BTC-USD)

“The ability to handle crypto as an asset is just the beginning of the transformation of financial services,” Dan Doney, CEO of Securrency, a digital infrastructure firm focused on the use of blockchain for financial services, told Seeking Alpha in a recent interview.

Doney pointed out that the global cryptocurrency market capitalization, which stands at $908.6B at the time of writing, is nowhere near the “$1.4 quadrillion scale” that represents the traditional financial services industry. But “that’s actually just the tip of the iceberg,” he added.

His remarks come as a growing number of major players in traditional finance (TradFi) expand their involvement in various areas of decentralized finance (DeFi), including lending, custody and derivatives trading. This trend remains intact even as digital token prices such as bitcoin (BTC-USD) and ethereum (ETH-USD) fall victim to over 70% pullbacks from their November 2021 peaks, underscoring institutional demand to at least explore DeFi- solutions in response to growing customer interest in blockchain technology and tokenized products.

Securrency itself is developing a blockchain-focused framework for managing financial services where it enables the ability to hold traditional assets in tokenized form. The company will act as a transfer agent for WisdomTree’s Short-Term Treasury Digital Fund (WTSY), whereby it will retain the primary record of share ownership for the fund and, unlike traditional mutual funds, will store a secondary record of the shares on either Stellar (XLM- USD) or ethereum (ETH-USD) blockchains.

Doney explained that WTSY recently got the green light from regulators for its “tokenized 1940 act fund” to enable “exposures to a variety of different investment strategies in tokenized form — the kind of thing you can have in your blockchain wallet.”

That’s important because the digital asset markets never close, which is “a huge advance over existing market structures,” he said. Blockchain also increases the speed and reduces the cost of transactions (T-0 settlement vs. T-2 clearance for traditional markets).

Regulatory compliance is key:

Some industry leaders have argued that a lack of regulatory oversight is preventing TradFi participants from entering DeFi. Doney, meanwhile, stressed “the regulatory guidance is clear,” adding that “it’s not a wise path to see if you can get around regulations. Instead, lean into the model and actually automate the key functions to get better oversight , and then you can unlock the true value of decentralization,” with the end goal of instant settlement and automated compliance via blockchain.

However, the regulatory landscape is “very fragmented,” Doney said. The lack of coordination between the Securities and Exchange Commission, the Commodity Futures Trading Commission and others is “slowing down our pace of innovation,” in a dynamic that could “cause parties to go overseas.”

Over the summer, the Federal Reserve made it clear that depository institutions considering offering crypto-related activities should have systems and controls adequate to conduct such activities safely.

Push for crypto custody:

Look no further than Bank of New York Mellon (BNY) to understand how bridging the gap between TradFi and DeFi is only progressing, albeit in its early stages. Earlier this month, the lender launched its Digital Asset Custody platform to allow some customers in the US to hold and transfer bitcoin (BTC-USD) and ether (ETH-USD), paving the way for increased crypto adoption.

“Institutional adoption of crypto continues to rise at unprecedented levels,” said Eric Chen, CEO and co-founder of Injective Labs. “Having access to institutional custodians like BNY Mellon enables larger players to get on board the broader crypto ecosystem as it adds more confidence to the overall space.”

Even more recently, French banking giant Societe Generale’s ( OTCPK:SCGLF ) crypto business, Forge, had won registration with the Autorité des Marchés Financiers for digital asset custody and trading. Overall, a number of lenders that have at least considered adding crypto-related services include Customers Bancorp ( CUBI ), Metropolitan Bank ( MCB ), and SVB Financial ( SIVB ).

By and large, however, the traditional financial structure does not provide retail (non-accredited) investors with nearly the same access to the financial markets (think something along the lines of private offerings) that institutional investors have – this is where blockchain comes into play.

“Allowing more regular users to enter the market means it can actually be more capital efficient in certain respects,” Chen explained in an email to SA. But banks offering DeFi-centric solutions to their customers “must be compliant, protect private keys of users and also set up systems to unlock events in case those keys are lost.”

When asked whether the banks’ crypto custody platforms offer the right investor protection for their retail clients, “of course, banks will be quite compliant in their offerings when they are custodianing cryptoassets that offer financial protection for users,” Chen said. Still, it’s “difficult to make a general statement and claim that all banks are safe. As we’ve seen many times in the past with bank runs or other black swan events, banks can lose your money, which means they can also lose the crypto your.”

See why Morgan Stanley believes the crypto ecosystem is becoming less decentralized.