Crypto Mainstreaming Mostly a One-Way Road
While cryptocurrencies are increasingly entering the mainstream, many developments appear to be the case of decentralized finance entering the world of traditional finance and less so the other way around.
This year may well turn out to be another major milestone year for the adoption of cryptocurrencies and the digital asset class’ further inroads into the mainstream. One noteworthy trend is the effort to bridge companies and asset owners in the world of decentralized finance (DeFi) to traditional finance (TradFi).
Some DeFi firms, for example, are seeking access to traditional banking infrastructure such as crypto prime broker FalconX which announced a strategic partnership yesterday with Standard Chartered. In other cases, crypto holders are looking for traditional financial products, such as money market funds, in the form of interchangeable tokens.
«Some of the parties buying into those assets are the likes of stablecoin providers […] who want to invest their balance sheet into reliable, safe assets that are liquid. There are corporate treasurers managing substantial on-chain cash balances for yield and efficiency. And you have the kind of digital retail investor that has perhaps traditionally held crypto but now wants to diversify their portfolio,» said Simon Keefe, head of digital solutions at Calastone, in a conversation with finews.asia.
What About TradFi to DeFi?
Although there are plenty of efforts from DeFi to enter TradFi, there is relatively less action in the other direction. A handful of TradFi companies offer crypto exchange-traded funds and research. Singapore’s DBS stands out as an exception with the traditional lender having already launched a digital asset exchange in 2020 to provide spot crypto trading with the offering growing to seven different coins.
And this is not due to the lack of end-client interest. In a «Bloomberg» report, Amy Lo, Asia co-head of wealth management at UBS, said that wealthy clients in the region were shifting away from US dollar assets to crypto, in addition to gold and China.
Regulatory Challenges
The major obstacle for TradFi companies like banks is regulatory. Fulfilling know-your-client (KYC) requirements, such as the confirmation of wealth sources, can be especially difficult and complex due to the decentralized nature of cryptocurrencies. Aside from fines for potential violations, there is also a greater cost for established companies in terms of their reputations which have been built over decades or even centuries.
«One of the challenges we face is that regulations have not caught up with the expectations of the market. The US is arguably the leader in regulation. Everyone else is behind it,» said Mike Tae, co-president of Broadridge’s investor communication solutions business, during a recent media briefing attended by finews.asia.
«[TradFi companies] are reluctant not because of lacking interest but because of regulatory and compliance issues,» added Jupiter Zheng, partner, liquid funds and research at HashKey Capital in an interview. «Actually from the frontline people – especially salespeople – they want more services and more products.»
Risk of Complacency
Excessive complacency will risk a continued loss of market share to emerging DeFi companies that are better positioned to serve digitally native clients. For TradFi players banking on their more conservative client base being relatively slow adopters, the trend is slated for further acceleration due to a historic wealth transfer of $83.5 trillion to the next generation in the coming 20 to 25 years, according to a UBS estimate.
This issue is not limited to companies. Traditional hubs also face a similar risk of not being able to catch up with the times.
«Crypto wealth no longer belongs exclusively to traditional finance capitals like New York, London, or Singapore. It’s borderless, fluid, and finding new homes wherever innovation and clarity converge. Cities and nations that embrace these dynamics will set the stage for the next financial era,» said a report by global mobility firm Multipolitan.
Extinction or Evolution?
Some are less optimistic about the ability of banks to adapt. Eric Trump, son of US President Donald Trump, said in a «CNBC» report that banks could become «extinct in 10 years» due to issues like lacking inclusion or politicization. Others are more hopeful that traditional leaders will be able to evolve, either by developing or buying capabilities to meet client needs and compete with DeFi firms.
«I think the TradFi companies will catch up in crypto. The next four-year cycle for Bitcoin will be a perfect timing for the massive institutional adoption,» said Zheng.
