Traditional Finance Is Watching The Rise of DeFi Closely, Crypto.com and BCG Study Finds

Traditional Finance Is Watching The Rise of DeFi Closely, Crypto.com and BCG Study Finds

October 27, 2020

Key Takeaways

  • In a survey led by BCG and Crypto.com, a vast majority of financial institutions are exploring DeFi.
  • Many of these firms command multi-billion dollar balance sheets and could shift the needle upon entering the space.
  • Security concerns and regulatory uncertainty are the two largest barriers.

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Leading tokens from this summer’s DeFi craze may be crashing, but the sector is far from over. And with interest from multi-billion dollar institutions, many believe that true innovation has only just begun. 

Traditional Finance Wants a Piece of the DeFi Pie

In collaboration with Boston Consulting Group Platinion (BCG), leading crypto company Crypto.com revealed that a staggering 86% of financial institutions surveyed are exploring DeFi. 

The research confirms many of the suspicions within the crypto community: Institutions are coming. What’s more, these firms are eager to find collaborators. 

Eric Anziani, the COO of Crypto.com, told Crypto Briefing that: 

“A surprising 86% are implementing or assessing services built on a DeFi framework and most (35%) of them are collaborating with an existing consortium, platform, application, or service to roll that out. This indicates an appetite for collaboration between traditional finance organizations and blockchain firms who hold the DeFi technological expertise, as only 24% are developing their own consortium or platform.”

These organizations are turning to crypto technologies for several reasons, including improving remittances and payments networks. 

Though many crypto enthusiasts complain about slow transaction speeds on leading networks like Bitcoin and Ethereum, these are nothing compared to transactions made outside of crypto. 

Though it is unclear precisely which network is leading the race, Anziani confirmed that “cryptocurrencies with fast transaction speeds, lower fees, and a decentralized approach offers a clear competitor to legacy financial systems.” 

The companies pouring into the space are no small fish either. Roughly 70% of the organizations surveyed command more than $12 billion on their balance sheets. Though the research indicates that only a minority have already deployed crypto-based use cases, the vast majority have made DeFi a high priority item for further investigation, according to Anziani. 

This exploration is currently being executed via existing consortiums and platforms. Naturally, interest from this demographic of business is hugely beneficial for crypto-specific companies like Crypto.com. Anziani said:

“The crypto payment solution we have been building and recently launched to a new testnet Croseid, is a great example of the types of products these institutions will be looking at. It enables transactions worldwide between people and businesses in a permission-less manner, with the support of settlement agents and validators, rewarded in our native token CRO. This will reduce up to 80% of processing fees compared with existing payment solutions.”

Indeed, firms like Crypto.com that are open to building a bridge between both worlds are at a huge advantage. That doesn’t mean that further adoption will be easy, however.

Roadblocks Ahead for Further Adoption

Hedge funds, trading desks, and financial brokers have a much different risk profile than the average DeFi user. And with hacks sprouting up nearly every day, security is still a formidable barrier for these multi-billion dollar companies. 

Alongside tampering major risks, firms are keenly aware of the rise of regulations focused on roping in the crypto market. This focus has been seen in the takedown of the long-time Bitcoin derivatives exchange, BitMEX, as well as Britain’s financial watchdog banning crypto derivatives trading. 

Regulators are also interested in addressing the growing popularity of privately-issued stablecoins like Tether’s USDT and Circle’s USDC. Various governments have been clear that national currencies, or cryptocurrencies pegged to fiat, will only be distributed by central banks. 

Far from over, regulatory discussions are ongoing. And according to Anziani, the crypto space must participate in this dialogue. He said:

“With the continued growth and adoption of crypto worldwide, regulators are keen to ensure that markets are protected from fraud and to keep their financial users’ interests safe. We must continue to work with regulators to support their concerns and find common ground policies that protect all parties involved and ensure that the full potential of decentralized finance is still able to be realized.” 

Adding the Next $10 Billion to DeFi

Retail investors have primarily dominated DeFi. And so far, that has been sufficient to continue growing the sector. 

Adding the next $10 billion, however, will come from a much different source. 

According to the research from BCG and Crypto.com, institutional investors are watching closely. Polishing regulatory guidelines and doubling down on security measures will help them make the next step, and bring DeFi across the line.

Disclosure: Crypto.com is a sponsor of Crypto Briefing.

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