TradFi’s Integration With DeFi Is Accelerating Beyond The Point Of No Return

Traditional financial services players have slowly come to understand that they can no longer ignore the rise of crypto assets as an investment class. As the adoption of crypto becomes more widespread, the TradFi industry has recognized that it must become a stakeholder in this new world of finance.

Decentralized finance, or DeFi, is an emerging technology that will have a big impact on so-called TradFi, as the traditional financial world is referred to by crypto natives. Banks have come to view DeFi not only as a major disruptive force but also one that provides them with unique opportunities that cannot be ignored. As such, many banks have responded by creating teams or divisions focused entirely on crypto and digital assets and how these technologies can be integrated with their own services.

Banks Are Already Embracing Crypto

One of the first major banks to recognize it cannot ignore crypto was Goldman Sachs, which has publicly stated that DeFi provides significant advantages over TradFi due to its ability to improve access for underbanked populations and enable faster trade settlements. Other benefits of DeFi include the unique financial products it offers, its faster pace of innovation, increased transparency, superior efficiency and lower-cost, cross-border payments.

Given these advantages, banks have already begun to embrace blockchain technology in different ways. For instance, JPMorgan Chase in 2019 designed its very own blockchain network to facilitate instant payments using a cryptocurrency token it christened JPM Coin. Through this, it can now facilitate money movement on a 24/7 basis, improving its ability to process cross-border payments. It recently said JPM Coin now handles over $1 billion worth of transactions each day.

In 2022, JPMorgan Chase welcomed crypto exchanges into its arms for the first time, extending traditional banking services to platforms such as Coinbase. In addition, JPMorgan, Goldman Sachs and Morgan Stanley started offering access to crypto funds for their wealth management clients. That suggests that despite the banks own ambivalence towards crypto, they recognize the growing interest in digital assets among traditional investors.

It’s not just U.S. banks who are embracing crypto, either. The Commonwealth Bank of Australia, the largest financial services institution in that country, said last year it is partnering with Gemini and Chainalysis on a crypto services offering for its customers. It was the first time an Australian bank has offered its customers the chance to trade crypto assets, and they can do so through CBA’s own mobile application.

The partnership between CBA and Gemini and Chainalysis integrates elements of DeFi with TradiFi through traditional application programming interfaces, which perform the role of connecting blockchains to existing financial systems. The initiative is likely to serve as a showcase for how other banks and financial institutions can access the world of crypto, too. At the same time, it brings greater legitimacy to the crypto industry and underscores the need for TradFi to innovate and embrace new business models if it wants to remain relevant.

TradFi & DeFi Partner To Boost Inclusivity

Although these early integrations between TradFi and DeFi might set off alarm bells for crypto natives and their desire to adopt a truly decentralized financial system, the truth is that such initiatives should be welcomed. For one thing, the fact it is happening suggests DeFi is increasingly gaining traction and earning recognition among the mainstream population. Second, it introduces more people to crypto and its decentralized protocols, who can then learn about the unique benefits and opportunities DeFi provides.

Another crucial benefit is that TradFi brings greater regulation to the table, which is something DeFi sorely lacks. By providing their customers with safe and regulated access to crypto services, TradFi is making DeFi more accessible to a wider class of investors.

DeFi faces a bit of a conundrum, in that it desires to become more inclusive and democratized access to the world of finance. Yet, the highly technical nature of most DeFi protocols, combined with its use of complex jargon and terminology and often mediocre user experience, has created a substantial barrier to adoption. The undeniable fact is, most users simply don’t understand how DeFi works.

By integrating with major players such as CBA, DeFi can be accessed to more users via the familiar interface of TradFi applications. This opens the door to DeFi for thousands of users who would otherwise never bother to explore it on their own initiative.

A growing number of TradFi institutions have come to recognize this. For instance, the leading financial derivatives trading platform MultiBank moved into the digital assets scene back in 2022 with the launch of its subsidiary MultiBank.io. MultiBank made its name as an online trading platform where users can build up a portfolio and trade assets such as derivatives, forex, commodities and traditional stocks and shares. It’s notably one of the more regulated platforms too, having obtained 14 financial licenses from various regulatory bodies globally.

By entering the crypto space, MultiBank is leveraging its trusted reputation to reassure investors who may have concerns over the lack of regulation in crypto, paving the way for more people to interact with digital assets for the first time. MultiBank recently doubled-down on its mission to bridge the worlds of DeFi and TradFi with the launch of a new, all-in-one trading application called MultiBank-Plus.

Elsewhere, the Fintech platform provider Block, previously known as Square, is said to be planning a platform that will enable customers to access DeFi services.

This trend is happening in reverse too, as DeFi’s biggest and best known protocols begin probing opportunities in TradFi. A good example is Aave, the DeFi lending platform, which recently created a new protocol directed at institutional investors that offers strict Know Your Customer procedures and has tough regulatory requirements on both the borrowing and lending sides. Meanwhile, Paperchain is an innovative project that allows digital creators and musicians to access their funds more quickly, using invoices as collateral to obtain DeFi loans in an instant and with minimal hassle. The crypto loans can even be exchanged directly into fiat via Paperchain’s Visa debit card, enabling users to pay for items in traditional stores.

Strong Incentives For Further Integration

It’s not really the fear of becoming less relevant that’s driving TradFi into the arms of DeFi, but rather the strong incentives decentralized money provides. In terms of efficiency, cost-effectiveness and risk minimization, DeFi provides compelling benefits. Surprisingly, one of them is greater security and reduced risk, which might seem ironic given how crypto is so strongly associated with scams. However, the design of blockchain can be useful, as transactions are irreversible and highly transparent, which can aid in the fight against fraud and money laundering.

Added to that, blockchain is uniquely able to facilitate cross-border transactions in real-time, making it far superior to existing TradFi infrastructures that require the use of multiple intermediaries and take days to process. With blockchain, transactions are faster and cost less, and as TradFi starts to embrace this reality, it will force every financial institution to do the same.

All told, there are clear incentives for TradFi to bring DeFi into its systems, enabling it to take advantage of opportunities that previously couldn’t exist. Then there are the longer-running trends of globalization, digitization and reduced trust in centralized institutions and governments, which further accelerate the need for TradFi to create synergies with DeFi.

The integration of TradFi with DeFi has already begun and it is looking more and more like an unstoppable trend. For DeFi, it’s something to be welcomed, as TradFi will act as a bridge that will significantly further its mission to enhance financial inclusion and provide everybody with opportunities to grow their wealth.

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