In The Big Bank Bang Era, How To Bridge The Gap Between TradFi and Crypto?

The convergence of TradFi and DeFi systems is inevitable and is only a matter of time. And many experts in both fields do not cease to discuss the obvious benefits it can introduce to the users. However, it may not necessarily allay the fears of institutional investors and their clients in the crypto industry. Especially considering we were in the midst of arguably one of the worst crypto years, with the FTX collapse as the final nail in the coffin of dropping crypto prices.

Recent news of the Silicon Valley Bank collapse, Silvergate Capital’s “voluntary liquidation” of its assets, and Signature’s shutdown by regulators will certainly result in a decrease in the institutional trust of the crypto-friendly TradFi players.

In 2022, private equity and institutional investments in crypto and DeFi have significantly declined over the course of the year. The total market cap for all cryptocurrencies reached close to $3 trillion in November 2021 but had dropped by nearly 73% to about $811 billion as of the end of 2022.

Although prominent finance experts focus on an inevitable merger of TradFi and DeFi systems, we must understand there is a long road to getting there. And this junction will be anything but easy, considering the polar difference between these industries. Let’s analyse the main barriers traditional financial institutions face while entering the digital assets market and what can be done to eliminate them.

In Money We Trust

The modern financial system, traditional or not, is fundamentally based on trust. Flat currencies issued by governments all over the world are valued as long as we believe they are valuable and functional. It is the decision we as a society made a long time ago. You are not here for a history lesson, I know. Still, it is vital to establish a simple notion: institutional investors and their clients cannot fully rely on the market of digital assets because, as they rightfully see, it can be unpredictable and unstable.

For a CeFi and DeFi junction to work, traditional financial institutions and their clients must be confident that the cryptosystem will remain secure and that their money will be processed properly. As it has worked between TradFi parties for ages. Contrary to DeFi, traditional banks and other financial institutions are not new to the burden of strict accounting audit measures and state regulators. Against this backdrop, the reasons behind hesitation to include crypto firms with their “excel file” accounting at the TradFi table is more obvious.

On the one hand, combining institutional crypto education with a user-friendly and transparent interface can facilitate mainstream DeFi adoption among TradFi users. On the other hand, TradFi is heavily and transparently regulated by governments across the globe, and it plays a tremendous role in trust building. This leads us to the next vital step in accelerating mass crypto adoption.

Regulate and Conquer

The crypto community needs to realise the essential driving force of regulations. We may be sceptical of some of the recent decisions made by the SEC, including a conversation around crypto assets claiming to be securities by SEC’s Chair Gary Gensler. Nonetheless, any mainstream financial industry needs to introduce an international regulatory framework to be trusted and transparent. The goal is to simply equate the crypto ecosystem to TradFi standards and prioritise the protection of both investors and financial institutions.

Numerous countries have introduced their stand on crypto regulations: from the UK’s ambitious plan to “detoxify” the market to China’s discreet support of Hong Kong’s ambitions to become the next crypto hub. However, there is no clear global approach to crypto regulations just yet.

The only logical step for a crypto community is to engage in the discussion around regulatory frameworks so our expert voices are heard and taken into account. The regulations will be introduced regardless, but our proactive approach to shaping the laws around the industry will benefit the crypto community at large.

Hong Kong’s recent bold step to legalise retail crypto trading and a Chinese general approach to crypto assets can serve as an example of how even the most conservative governments see potential in crypto. And maybe these well-thoughtful and meaningful steps to testing the crypto waters before possibly opening up to the industry on a country level can encourage other sceptical governments to join the historical transition.

Building a Bridge

I believe the discussion around the advantages of an inevitable merger between TradFi and DeFi systems is essential. Even more so, the conversation around the barriers faced by TradFi institutions and regular users is urgent if we want to accelerate crypto mass adoption.

We need to acknowledge and address the fears that institutional investors and clients face while considering entering the realms of digital assets. The uncertainties surrounding crypto assets will never go away unless we shed light on the steps that must be taken to build a bridge between traditional and digital assets.

And as that transition continues, we can expect to witness a crypto economy with DeFi and CeFi co-existing as a hybrid model, each securely operating and strengthening the other’s weaknesses.

Masha Balanovich is a market advisor and External Communications Manager at fintech PR consultancy Drofa Comms. Masha is an expert in client relations with an extended background in finance. She communicates daily with leading market experts, allowing her to stay current on the latest industry trends.

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