Crypto experts map out path for bridging gap between TradFi, DeFi (Cryptocurrency:BTC-USD)

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

Doney pointed out that the global market cap of cryptocurrencies, standing at $908.6B at the time of writing, is nowhere near to the “$1.4 quadrillion scale” representing the traditional financial services industry. But “it’s actually just the tip of the iceberg,” he added.”

His remarks come as a growing number of big players in traditional finance (TradFi) deepen their involvement in different areas within decentralized finance (DeFi), including lending, custody and derivatives trading. That trend remains intact even as digital token prices like bitcoin (BTC-USD) and ethereum (ETH-USD) fall victim to over 70% drawdowns from their November 2021 peaks, underscoring institutional demand for at least exploring DeFi solutions in response to growing client interest in blockchain technology and tokenized products.

Securrency itself is developing a blockchain-focused framework for managing financial services in which it enables the ability to have traditional assets in tokenized form. The company will act as the transfer agent for WisdomTree’s Short-Term Treasury Digital Fund (WTSY) whereby it will keep the primary record of share ownership for the fund and, unlike traditional mutual funds, it 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 range of different investment strategies in tokenized form –the kind of thing you can hold in your blockchain wallet.”

That’s important because the digital asset markets never close, which is “a big advance over the existing market structures,” he said. Also, blockchain quickens 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, emphasized “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.

The regulatory landscape, though, is “very fragmented,” Doney said. The lack of coordination among the Securities and Exchange Commission, the Commodity Futures Trading Commission, and others “slows down our pace of innovation,” in a dynamic that could “lead to parties going overseas.”

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

Crypto-custody push:

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 the early stages. Earlier this month, the lender rolled out its Digital Asset Custody platform to let some clients in the U.S. hold and transfer bitcoin (BTC-USD) and ether (ETH-USD), paving the way for increased crypto adoption.

“Institutional adoption of crypto is continuing to rise at unprecedented levels,” said Eric Chen, CEO and co-founder of Injective Labs. “Having access to institutional custodians such as BNY Mellon enables larger players to onboard into the broader crypto ecosystem since it lends more trust 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 slew of lenders that have at least considered adding crypto-related services include Customers Bancorp (CUBI), Metropolitan Bank (MCB) and SVB Financial (SIVB).

Broadly speaking, though, the traditional financial structure isn’t providing retail (non-accredited) investors with nearly the same access to financial markets (think of something along the lines of private offerings) that institutional investors have — that’s where blockchain comes into play.

“Allowing more everyday users to enter the market allows for it to actually be more capital efficient in certain respects,” Chen explained in an emailed statement to SA. But banks that offer DeFi-centric solutions to their customers “will have to be compliant, protect private keys of users and also set up systems for unlocking events in case those keys are lost.”

When asked about whether banks’ crypto custody platforms offer proper investor protections for their retail customers, “Banks of course will be quite compliant in their offerings when custodying crypto assets which offers financial protections for users,” Chen said. Still, It’s “difficult to make a general statement and claim all banks are safe. As we have 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 your crypto.”

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