- Traditional finance is increasingly looking to decentralised finance solutions
- ‘Banks are really pro-using distributed ledger technology.’
- Violet, a Brevan Howard-backed crypto firm; GMEX Group, a market infrastructure vendor; and Blockhouse, a DeFi exchange for bond derivatives, are leading the way.
Titans of finance including BlackRock and Fidelity made waves and sent crypto markets soaring earlier this month with plans to expand their offerings in Bitcoin.
At the same time, the Bank of International Settlements and a trio of central banks quietly detailed another groundbreaking crypto project.
They detailed a proof-of-concept for trading digitised euros, Swiss francs, and Singaporean dollars using an automated market maker from decentralised protocol giant Curve.
‘They all have a different perspective on it, depending on their own goals and risk appetite’
Market watchers called it an exciting development — a real-world use case for the freewheeling world of blockchain-based finance known as DeFi.
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Experts say traditional financial institutions are increasingly looking to decentralised finance solutions to power the world’s financial system.
“I put it somewhere between curious and chomping at the bit,” Matt McGuire, general counsel at Violet, told DL News.
Violet is one of several crypto companies geared toward institutional investors, and its products include Mauve, billed as a compliant decentralised exchange.
“They all have a different perspective on it, depending on their own goals and risk appetite, and familiarity with the space,” McGuire said.
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This year, US lawmakers have locked horns over how to best regulate digital assets, and regulators — spearheaded by Securities and Exchange Commission Chair Gary Gensler — have cracked down on the crypto industry with enforcement actions and lawsuits.
At the same time, firms want to ensure they aren’t doing business with bad actors, raising the need for customer background checks in order to remain compliant to anti-money laundering rules.
Know your customer
GMEX Group, a market infrastructure vendor, is among those chomping at the bit.
It bought Pyctor, a decentralised crypto custody platform, from Dutch banking giant ING last year in order to prepare for an eventual jump to DeFi, CEO Hirander Misra told DL News.
“We have figured out how to deploy and laid the foundations for [DeFi] — as in the rails — but have not pulled the trigger yet due to the regulatory uncertainty,” he said.
“A consensus driven trustless system with more transparency and automation can only be a good thing as long as KYC/KYB checks and balances are in place.”
Know-your-customer checks enable businesses to ensure that customers are who they say they are in order to prevent money laundering, scams, and terrorism financing.
GMEX Group is not alone.
In November, Oliver Wyman, JPMorgan, DBS, and SBI Digital Asset holdings published a report titled Institutional DeFi: the next generation of finance?.
It detailed how financial institutions might be able to borrow DeFi technology and mould it for their own purposes.
“Banks are really pro-using distributed ledger technology,” Aaditya Krishnamohan, co-founder of Blockhouse Capital, told DL News.
“What they’re looking to do is replicate traditional offerings in a digital format.”
DeFi’s ‘major issue’
Blockhouse is a DeFi exchange for bond and credit derivatives.
While it was founded to take advantage of a potential merger between traditional and decentralised finance, Krishnamohan said it is at least five years away.
‘Firms that wish to apply DeFi in their client offerings must incorporate the same, if not higher, levels of safeguards and security standards’
“These financial firms, their number-one goal is to be compliant,” he said.
“For them, the technology is sort of on the back burner when it comes to working with especially non-compliant pieces of infrastructure to trade financial assets.”
The Oliver Wyman report notes: “Many DeFi protocols today are not designed for use in mainstream finance.”
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“Firms that wish to apply DeFi in their client offerings must incorporate the same, if not higher, levels of safeguards and security standards that have been developed over decades in the finance industry.”
Violet is backed by Brevan Howard Digital, the crypto arm of hedge fund Brevan Howard.
McGuire called it DeFi’s “major issue.”
“Unless you’re building a closed system where only certain banks, for example, are participating in it — which may or may not be quote-unquote real DeFi — you still have that issue.”
Violet is backed by Brevan Howard Digital, the crypto arm of Brevan Howard.
McGuire declined to comment on conversations with Brevan Howard, but said Alan Howard’s hedge fund is “always engaged with our investors, talking about different ideas, thoughts, and what might be valuable to the market.”
At a conference organised by Coinbase last month, BlackRock’s Joseph Chalom commented on the need for KYC safeguards in crypto.
“All I know is, we go to jail if we don’t know who we’re trading with,” he said.
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But Misra said relief could come sooner. This year, a court is expected to rule in a lawsuit the SEC filed against Ripple, the issuer of the XRP token.
The outcome could provide clarity on the question of whether most crypto assets should be considered securities, like stocks, or commodities, like gold or wheat.
“The Ripple suit being resolved one way or another would lead to the gates being opened,” Misra said.
And an approval for Blackrock’s Bitcoin ETF may even lead to this sooner, he said.
Either way, he said it’s only a matter of time before traditional finance will run on technology built by their crypto counterparts.
“For effective settlement finality you will increasingly see the jump from TradFi right to DeFi for decentralised settlement,” he said.
Do you have a tip on TradFi’s DeFi strategy or another story? Contact aleks@dlnews.com.