Author: Insights4vc Translator: Shan Ouba, Jinse Finance
Since 2020, major U.S. banks, asset managers, and payment institutions have shifted from cautious observation to active investment, partnerships, or the launch of crypto products. By early 2025, institutions already hold about 15% of the Bitcoin supply, and nearly half of hedge funds have allocated some of their funds to digital assets. Key factors driving this trend include: the launch of regulated crypto investment tools (such as the first Bitcoin and Ethereum spot ETFs in the United States in January 2024), the tokenization of real assets (RWA) on the blockchain, and the increasing use of stablecoin settlement and liquidity by institutions . Institutions see blockchain as a tool to streamline traditional financial back-end systems, reduce costs, and enter new markets.
Many banks and asset managers are piloting permissioned DeFi platforms that combine smart contract efficiency with KYC/AML compliance, while also exploring permissionless public DeFi in a controlled environment. The automation and transparency of DeFi is expected to bring faster settlement, 24/7 markets, and new revenue opportunities, thereby solving the long-standing inefficiencies of traditional finance. However, institutions still face severe challenges, mainly including regulatory uncertainty in the United States, difficulty in technology integration, and market volatility , which have limited the speed of adoption to a certain extent.
Overall, the trend of institutional adoption of crypto assets is "cautious but accelerating" by March 2025. Traditional finance is no longer just a bystander, but is carefully testing the waters in selected areas such as digital asset custody, on-chain lending, and tokenized bonds to gain tangible benefits. The next few years will be a critical period to determine how traditional finance and DeFi will be deeply integrated in the global financial system.
Paradigm Report - The Future of Traditional Finance (March 2025)
Paradigm, a leading crypto venture capital fund, surveyed 300 professionals from traditional financial institutions in multiple developed economies and released its latest report. Here are the key data from the report.
Which areas contribute most to the cost of financial services?
What cost-cutting strategies does your organization employ in providing financial services?
Currently, approximately 76% of companies are involved in cryptocurrency
About 66% of TradFi companies are working with DeFi
About 86% of companies are currently involved in blockchain and DLT
Institutional Entry into Crypto Market (2020–2024 Timeline)
2020 - Initial Trials
Banks and financial institutions have begun to cautiously enter the crypto market. In mid-2020, the U.S. Office of the Comptroller of the Currency (OCC) made it clear that banks could provide crypto asset custody services, opening the door for custodians such as BNY Mellon (which announced digital asset custody services in 2021). The corporate fund management sector has also begun to lay out, with MicroStrategy and Square's high-profile purchases of Bitcoin as reserve assets, marking the growth of institutional confidence. Payment giant PayPal launched cryptocurrency buying and selling functions for U.S. users at the end of 2020, making digital assets accessible to millions of consumers. These moves mark the beginning of mainstream institutions' recognition of cryptocurrencies as a legitimate asset class.
2021 - Rapid Expansion
Driven by the bull market, the pace of institutional adoption of cryptocurrencies has accelerated. Tesla spent $1.5 billion to buy Bitcoin, and Coinbase went public on the Nasdaq in April 2021, becoming a key bridge between Wall Street and the crypto market. Investment banks have responded to customer demand, with Morgan Stanley beginning to offer Bitcoin funds to wealthy clients and JPMorgan Chase restarting its crypto trading division. In October, ProShares launched the first U.S. Bitcoin Futures ETF (BITO), providing institutions with a regulated investment channel. Fidelity and BlackRock have established dedicated digital asset divisions. At the same time, Visa and Mastercard have also begun to use stablecoins for settlement (such as Visa's pilot USDC settlement), showing confidence in the crypto payment system.
2022 — Infrastructure Construction in a Bear Market
Despite the downturn in the crypto market in 2022 (Terra crash, FTX bankruptcy), institutions continue to build infrastructure. BlackRock partnered with Coinbase in August 2022 to provide crypto trading services to institutional clients and launched a private Bitcoin trust fund, which is an important signal from the world's largest asset management company. Traditional exchanges and custodians are also expanding digital asset services, such as BNY Mellon began to provide crypto asset custody to some customers, and Nasdaq launched a crypto custody platform. JPMorgan Chase uses blockchain for interbank transactions, and its Onyx division has processed hundreds of billions of dollars in wholesale payments through JPM Coin. At the same time, tokenization pilot projects have increased, and companies such as JPMorgan Chase have simulated DeFi transactions on public chains, including tokenized bonds and foreign exchange transactions (Project Guardian). However, US regulators have responded strongly to market volatility, causing some companies (such as Nasdaq) to suspend or slow down the launch of crypto products at the end of 2023, waiting for clearer regulations.
2023 – Institutions return to the market
In early 2023, institutional interest picked up. In mid-2023, BlackRock applied for a Bitcoin spot ETF, followed by Fidelity, Invesco and other companies, which was a major turning point, especially when the SEC had previously rejected such applications many times. Traditional financial-backed crypto infrastructure was also officially launched, such as the EDX Markets digital asset exchange backed by Charles Schwab, Fidelity and Citadel, which aims to provide institutions with a compliant trading venue. At the same time, the tokenization boom of traditional assets has emerged, such as private equity giant KKR tokenizing some funds on the Avalanche chain and Franklin Templeton migrating its tokenized money market fund based on US Treasuries to a public blockchain. International regulators have also begun to provide clearer regulatory frameworks (the EU passed MiCA and Hong Kong reopened crypto trading). By the end of 2023, the United States approved the Ethereum futures ETF, and the market's expectations for the passage of spot ETFs have increased. Institutional adoption of crypto assets appears more solid by the end of 2023, provided regulatory barriers are removed.
Early 2024 — Spot ETF Approval
In January 2024, the U.S. SEC approved the first Bitcoin spot ETF (and subsequently approved the Ethereum spot ETF), ending years of delays. This approval became a watershed moment in the mainstreaming of crypto assets, allowing pension funds, registered investment advisors (RIAs), and conservative portfolios that would not otherwise be able to hold crypto assets to enter the market. In just a few weeks, crypto ETFs saw a large influx of funds and a significant increase in investor participation. During the same period, institutional crypto services continued to expand, including PayPal's launch of the PYUSD stablecoin and Deutsche Bank and Standard Chartered's investments in digital asset custody startups. As of March 2025, almost all major U.S. banks, brokerages, and asset managers have launched crypto-related products or established strategic partnerships in the field, marking the full entry of institutions into the crypto market since 2020.
DeFi in the Eyes of TradFi (2023-2025)
Traditional finance (TradFi)'s attitude towards decentralized finance (DeFi) gradually changed between 2023 and 2025. From initial curiosity and caution to trying to explore the efficiency advantages of DeFi in a controlled environment, many institutions have recognized the importance of public blockchains. Although DeFi remained operational during the market turmoil in 2022, showing the advantages of automation and transparency, compliance and risk issues have made most institutions prefer "permissioned DeFi" - that is, using DeFi technology in a closed or semi-closed environment. For example, JPMorgan Chase's Onyx network launched JPM Coin to provide regulated stablecoin payment services to institutional clients, while Aave Arc introduced a KYC certification mechanism to enable qualified institutions to trade in decentralized liquidity pools. This strategy of "embracing technology, but controlling participation" has become TradFi's main response to DeFi before 2025.
Institutional DeFi Pilot
Between 2023 and 2025, several large financial institutions conducted DeFi pilots. JPMorgan Chase's Onyx platform worked with Project Guardian, led by the Monetary Authority of Singapore (MAS), to conduct tokenized bond and foreign exchange transactions on public blockchains and use smart contracts to achieve instant settlement. BlackRock launched the BUIDL fund at the end of 2023, tokenizing a U.S. Treasury money market fund and offering it to qualified investors through the Securitize platform, demonstrating how large institutions can use public blockchains within a compliance framework. Goldman Sachs' Digital Asset Platform (DAP) issued tokenized bonds and facilitated digital repo transactions, while HSBC used the Finality blockchain platform for foreign exchange settlement. These pilots show that traditional financial institutions are exploring how to apply DeFi technology to core businesses such as payment, lending and trading to improve efficiency through a "learning by doing" approach.
VC-backed infrastructure
A group of crypto infrastructure companies, backed by venture capital and traditional financial companies, are emerging to provide a bridge for institutions to enter DeFi. Custodians such as Fireblocks, Anchorage, and Copper have built "institutional-grade" digital asset management platforms to help banks safely store and trade crypto assets while providing compliance tools to enter DeFi protocols. Compliance technology companies such as Chainalysis and TRM Labs provide transaction monitoring and analysis, enabling banks to meet anti-money laundering (AML) requirements, even when operating on public blockchains. In addition, crypto brokers and fintech companies are also reducing the complexity of DeFi. For example, crypto custodians provide "yield farming" or liquidity pool access services without institutions directly managing on-chain operations. With the improvement of wallets, APIs, identity authentication, and risk management tools, the entry threshold of DeFi for TradFi institutions is gradually lowered. By 2025, decentralized exchanges (DEX) and lending platforms are gradually integrating institutional entrances to ensure that counterparties are verified. TradFi no longer regards DeFi as the "untouchable wild west", but as a financial innovation that can be used cautiously within a compliance framework. Large banks are becoming early adopters in controlled environments, recognizing that ignoring DeFi’s growth could leave them behind in financial development.
US Regulatory Environment (and Global Comparison)
The ambiguity of US regulation has hindered the advancement of TradFi in the crypto space, but it has also brought opportunities. In 2023, the US Securities and Exchange Commission (SEC) took a tough stance, suing major exchanges for offering unregistered securities and proposing to classify many DeFi platforms as securities exchanges, making it difficult for institutions to move forward in the DeFi space. At the same time, the US Commodity Futures Trading Commission (CFTC) regards Bitcoin and Ethereum as commodities and imposes fines on DeFi protocol operators while advocating a clearer regulatory framework. The US Treasury Department focuses on the anti-money laundering risks of DeFi. The 2023 report pointed out that the anonymity of DeFi may be exploited by illegal elements, so DeFi platforms may be required to implement KYC in the future. In 2022, the US Office of Foreign Assets Control (OFAC) sanctioned Tornado Cash, indicating that even decentralized code services cannot escape regulatory constraints. US banking regulators (OCC, Federal Reserve, FDIC) issued guidance to restrict banks from directly contacting crypto assets, forcing institutions to participate in the crypto market more through regulated custodians and ETFs rather than directly using DeFi protocols.
As of March 2025, the United States has not passed comprehensive crypto regulations, but proposals such as stablecoin regulation and securities-commodity division have entered the in-depth discussion stage. In the future, the United States' regulation of stablecoins (such as whether to define them as new payment tools) and custody rules (such as the SEC's custody proposal) will determine how deep TradFi institutions go in DeFi. Due to regulatory uncertainty, US TradFi institutions tend to limit DeFi experiments to controlled "sandbox" environments or overseas subsidiaries, waiting for clearer regulations to be introduced.
Europe – MiCA and forward-looking rules
Unlike the US, the EU has developed a comprehensive regulatory framework (MiCA - Markets in Crypto-Assets) that will provide clear rules for crypto-asset issuance, stablecoins and service providers in each member state by 2024. Together with the pilot regime for tokenized securities trading, MiCA provides European banks and asset managers with more certainty for innovation. By early 2025, European companies will know how to obtain a license to operate a crypto exchange or wallet service, and guidelines for institutional stablecoins and even DeFi are also being developed. This relative clarity of rules has prompted the European arm of TradFi to advance pilots of tokenized bonds and on-chain funds. For example, several EU commercial banks have issued digital bonds under the regulatory sandbox program and can legally process tokenized deposits under supervision. The UK has taken a similar approach: it has signaled that it wants to become a "crypto hub" by tailoring financial regulations - the FCA is developing rules for cryptocurrency trading and stablecoins from 2025, and the Law Commission has recognized crypto assets and smart contracts in its legal definitions. These moves may allow London-based institutions to deploy DeFi-based services faster than their US counterparts (within certain limits).
Asia – Regulatory balance and innovation
Singapore and Hong Kong offer a stark global contrast. The Monetary Authority of Singapore has a strict licensing regime for crypto firms (in place since 2019), but has also been actively experimenting with DeFi through public-private partnerships. Singapore’s main bank, DBS, has launched a regulated crypto trading desk and has even conducted DeFi transactions (such as a tokenized bond trade with JPMorgan). The city-state’s approach, which treats licensed DeFi as an area to be explored under supervision, reflects a view that controlled experiments can inform sensible rulemaking. After years of restrictions, Hong Kong reversed course in 2023, developing a new framework that licenses virtual asset exchanges and allows retail crypto trading under supervision. Backed by the government, this policy shift has attracted global crypto firms and encouraged banks in Hong Kong to consider offering digital asset services in a regulated environment. Other jurisdictions, such as Switzerland (whose DLT Act allows for tokenized securities) and the UAE (Dubai’s VARA has developed custom crypto rules), further highlight that regulatory attitudes around the world range from cautious adaptation to active promotion of crypto finance.
Impact on DeFi participation
For U.S. institutions, the fragmentation of regulation means that most direct participation in DeFi is out of reach until compliant solutions emerge . We see U.S. banks sticking to consortium blockchains or trading tokenized assets that meet existing legal definitions. Conversely, in jurisdictions with clearer frameworks, institutions are increasingly willing to interact with DeFi-like platforms—for example, a European asset manager might provide liquidity to a licensed lending pool, or an Asian bank might use a decentralized trading protocol internally for FX swaps, knowing that regulators are aware of the situation. The lack of unified global rules also creates challenges: an institution operating globally must reconcile strict rules in one region with opportunities in another. Many have called for international standards or safe harbors for decentralized finance to deliver on its strengths (e.g., efficiency, transparency) without compromising financial integrity. In summary, regulation remains the biggest factor determining the pace of TradFi’s participation in DeFi. By March 2025, progress is evident—ETFs approved in the U.S. and tailored licenses issued by global regulators—but there is still much work to be done to establish the legal clarity that will allow institutions to fully embrace permissionless DeFi at scale.
Key DeFi protocols and infrastructure bridge TradFi
Many leading DeFi protocols and infrastructure projects are directly addressing the needs of traditional finance, creating on-ramps for institutional use:
Aave Arc (Institutional Lending Market): Aave Arc is a permissioned version of the popular Aave liquidity protocol, launched in 2022-2023 to cater to the needs of institutions. It provides a private pool where only whitelisted KYC-verified participants can lend and borrow digital assets. By enforcing AML/KYC compliance (through whitelisting agents such as Fireblocks) and allowing only pre-approved collateral, Aave Arc solves a key requirement for TradFi - counterparty trust and regulatory compliance - while still providing the efficiency of DeFi's smart contract-based lending. This helps banks and fintech lenders tap into DeFi liquidity for secured lending without exposing themselves to the anonymous wilderness of public pools.
Maple Finance (On-Chain Capital Markets): Maple is an on-chain low-collateralized institutional loan marketplace , similar to the syndicated loan market on the blockchain. Through Maple, accredited institutional borrowers (such as trading firms or mid-sized enterprises) can access liquidity from global lenders on agreed terms, assisted by "pool representatives" who perform due diligence. This addresses a gap in TradFi: low-collateralized credit is often relationship-based and opaque, but Maple brings transparency and 24/7 settlement to such loans. Since its launch in 2021, Maple has originated hundreds of millions of dollars in loans, demonstrating how reputable companies can raise capital on-chain more efficiently . For TradFi lenders, Maple's platform provides a way to earn stablecoin yields by lending to vetted borrowers, effectively mirroring the private debt market but with lower administrative costs. It demonstrates how DeFi can simplify loan origination and servicing (interest payments, etc.) through smart contracts, thereby reducing administrative costs.
Centrifuge (Tokenization of Real World Assets): Centrifuge is a decentralized platform focused on bringing real-world assets (RWA) as collateral to DeFi . It allows originators (such as lenders in trade finance, invoice factoring, real estate) to tokenize assets such as invoices or loan portfolios into fungible ERC-20 tokens, which investors can then finance through DeFi liquidity pools (Tinlake in Centrifuge's case). This mechanism essentially connects TradFi assets to DeFi liquidity - for example, a small business's invoices can be pooled and funded by stablecoin lenders around the world. For institutions, Centrifuge provides a template for turning illiquid assets into investable on-chain instruments with transparent risk grading. It solves one of the core inefficiencies of TradFi by leveraging a global investor base on the blockchain: limited access to credit for certain industries. By 2025, even large protocols like MakerDAO will use Centrifuge to onboard collateral, and TradFi companies are watching how the technology can reduce capital costs and open up new sources of funding.
Ondo Finance (Tokenized Yield Products): Ondo Finance offers tokenized funds that allow crypto investors to access traditional fixed income yields. Notably, Ondo has launched products such as OUSG (Ondo Short-Term U.S. Government Bond Fund) , which is fully backed by a short-term Treasury ETF, and USDY , which is a tokenized share of a high-yield money market fund. These tokens are offered to qualified purchasers under Regulation D and can be traded on-chain 24/7. Ondo effectively acts as a bridge, packaging real-world bonds into DeFi-compatible tokens so that, for example, a stablecoin holder can swap for OUSG and receive a yield of about 5% on a treasury bill, and then seamlessly exit the stablecoin. This innovation solves a pressing problem facing TradFi and crypto: it brings the security and yield of traditional assets into the digital asset space and provides traditional fund managers with a new distribution channel through DeFi. The success of Ondo’s tokenized treasuries (with hundreds of millions of dollars issued) has prompted competitors and even incumbents to consider launching similar products, blurring the line between money market funds and stablecoins.
EigenLayer (Re-hypothesis and Decentralized Infrastructure): EigenLayer is a new protocol built on Ethereum (launching in 2023) that supports re-hypothesising - re-using the security of staked ETH to secure new networks or services. While still in its infancy, what it means for institutions is the scalability of the infrastructure . EigenLayer allows new decentralized services (such as oracle networks, data availability layers, and even institutional settlement networks) to inherit the security of Ethereum without the need for a separate validator set. For TradFi, this could mean that future decentralized exchanges or clearing systems can piggyback on an existing trust network (Ethereum) rather than starting from scratch. Institutional stakeholders are looking at EigenLayer as a potential solution to scale blockchain use cases with high security and low capital costs. From a practical perspective, banks could one day deploy smart contract services (for example for interbank lending or foreign exchange) and use re-hypothesis to ensure that billions of dollars in staked ETH are protected, achieving a level of security and decentralization that is not possible on a permissioned ledger. EigenLayer represents the cutting edge of decentralized infrastructure , and while not yet used directly by TradFi, it will likely form the basis for the next generation of institutional DeFi applications by 2025-2027.
These examples illustrate a broader point: The DeFi ecosystem is actively developing solutions to integrate TradFi's needs - whether it's compliance (Aave Arc), credit analysis (Maple), real asset exposure (Centrifuge/Ondo), or robust infrastructure (EigenLayer). This integration is bidirectional: TradFi is learning to use DeFi tools, and DeFi projects are adapting to meet TradFi's requirements, resulting in a more mature, interoperable financial system.
Tokenization and RWA Outlook
One of the most direct intersections between traditional finance and the crypto world is the tokenization of real-world assets - that is, putting traditional financial instruments (such as securities, bonds, and funds) on the blockchain. As of March 2025, institutional participation in tokenization has moved beyond the proof-of-concept stage and into actual product applications:
Tokenized Funds and Deposits
Several large asset managers have launched tokenized funds. BlackRock’s aforementioned BUIDL fund and Franklin Templeton’s OnChain U.S. Government Money Fund (which uses a public blockchain to record shares) allow accredited investors to trade fund shares in the form of digital tokens. WisdomTree has launched a suite of blockchain-based funds (providing exposure to Treasuries, gold, and more) with a vision of enabling 24/7 trading and simplified investor access. These initiatives are often structured under existing regulations (e.g., issued as private securities under an exemption), but they mark a significant shift—traditional assets are traded on blockchain infrastructure . Some banks have even explored tokenized deposits (regulated liability tokens) that represent bank deposits but can be moved on-chain, aiming to combine bank-grade security with cryptocurrency-like speed. Each of these projects shows that institutions see tokenization as a way to increase liquidity and reduce settlement times for traditional financial products.
Tokenized bonds and debt
The bond market has seen early wins for tokenization. In 2021-2022, entities such as the European Investment Bank issued digital bonds on Ethereum , with participants settling and escrowing the bonds through the blockchain rather than traditional clearing systems. By 2024, banks such as Goldman Sachs and Santander facilitated bond issuances on their private blockchain platforms or on public networks, showing that even large debt issuances can be completed through DLT. Tokenized bonds promise near-instant settlement (T+0 rather than the typical T+2), programmable interest payments, and easier fractional ownership. For issuers, this can reduce issuance and management costs; for investors, it can expand access and provide real-time transparency. Even government finance ministries have begun to explore the use of blockchain for bonds - for example, the Hong Kong government issued a tokenized green bond in 2023. The market size is still small (on-chain outstanding bonds are about hundreds of millions of dollars), but growth is accelerating as the legal and technical frameworks are improved.
Private Market Securities
Private equity and venture capital firms are tokenizing portions of traditionally illiquid assets, such as private equity funds or pre-IPO stocks, to provide liquidity to investors. Firms such as KKR and Hamilton Lane have partnered with fintech firms (Securitize, ADDX) to provide tokenized access to portions of their funds, allowing qualified investors to purchase tokens that represent economic interests in these alternative assets. While still limited in scope, these experiments point to a future where secondary markets for private equity or real estate could operate on the blockchain, potentially reducing the liquidity premium that investors demand for such assets. From an institutional perspective, tokenization here is about expanding distribution and unlocking capital by making traditionally locked assets tradable in smaller units.
Crucially, the tokenization trend is not limited to TradFi-led initiatives — DeFi-native RWA platforms are tackling the same problem from another angle. Protocols like Goldfinch and Clearpool (as well as the aforementioned Maple and Centrifuge) are enabling on-chain financing of real-world economic activity without waiting for big banks to act. For example, Goldfinch funds real-world loans (such as emerging market fintech lenders) through liquidity provided by cryptocurrency holders, essentially acting as a decentralized global credit fund. Clearpool provides a marketplace for institutions to launch unsecured lending pools under pseudonyms (with credit scores) and let the market price and finance their debt. These platforms often partner with traditional companies — for example, the financial status of fintech borrowers in Goldfinch pools may be audited by third parties — creating a hybrid model of DeFi transparency and TradFi trust mechanisms.
Currently, RWA tokenization has a bright future. Due to rising interest rates, the crypto market has a strong demand for real-world asset returns , which has further promoted the tokenization of bonds and credit (such as Ondo's success story). Institutions are attracted by the improvement of trading efficiency : tokenized markets can settle in seconds , operate around the clock , and reduce dependence on intermediaries such as clearing houses .
Industry forecasts suggest that trillions of dollars of real assets could be tokenized in the next decade , provided regulatory issues are resolved. In 2025, we have seen initial network effects - for example, tokenized treasury bonds can be used as collateral in DeFi loan agreements , which means that an institutional trader can use tokenized bonds to borrow stablecoins for short-term liquidity management, which is impossible in traditional markets. This on-chain composability will completely change the collateral and liquidity management model of financial institutions .
Overall, tokenization is narrowing the gap between TradFi and DeFi , perhaps more directly than any other trend. It allows traditional assets to enter the DeFi ecosystem (providing stable on-chain collateral and cash flow), while also providing a safe experimental environment for TradFi institutions (through permissioned blockchains or known legal structures). In the coming years, we may see larger-scale pilots - such as major stock exchanges launching tokenized trading platforms and central banks exploring wholesale CBDCs (central bank digital currencies) compatible with tokenized assets , further consolidating the future role of tokenization in the financial industry.
Challenges and strategic risks of TradFi entering DeFi
Despite the huge opportunities, traditional financial institutions face a series of challenges and risks when integrating DeFi and crypto assets:
Regulatory uncertainty: The lack of clear and consistent regulations is the biggest risk . If banks use DeFi protocols that are later determined to be illegal securities exchanges or involve unregistered asset transactions, they may face enforcement risks. Differences in regulations between different countries further complicate the use of crypto networks across borders .
Compliance and KYC/AML: DeFi platforms on public chains usually allow anonymous transactions , which conflicts with banks' KYC/AML (anti-money laundering) obligations. How to implement compliance on the blockchain (such as whitelist mechanisms, on-chain identity verification, and compliance oracles) is still under exploration, and compliance risks make TradFi more inclined to licensed or regulated DeFi solutions .
Custody and security: Private key management is a major risk (loss or theft may render assets unrecoverable). Vulnerabilities or hacker attacks on DeFi smart contracts also worry institutions, and many companies rely on third-party custodians or self-built cold storage solutions , but these solutions still lack comprehensive insurance .
Market volatility and liquidity risk: Cryptocurrency markets are notoriously volatile. Institutions that provide liquidity to DeFi pools or hold cryptocurrencies on their balance sheets must withstand large price swings that could impact returns or regulatory capital. In addition, DeFi market liquidity can evaporate quickly in a crisis; if users of the protocol default (e.g., undercollateralized loans fail), institutions may have difficulty closing large positions without slippage or even face counterparty risk . This unpredictability contrasts with the more controlled volatility and central bank support in traditional markets.
Integration and technical complexity: Integrating blockchain systems with traditional IT infrastructure is complex and expensive. Banks must upgrade their systems to interact with smart contracts and manage 24/7 real-time data, which is a daunting task. In addition, there is a talent gap - evaluating DeFi code and risks requires expertise, which means that institutions need to hire or train experts in a highly competitive talent market. These factors lead to high initial entry costs.
Reputational risk: Financial institutions must consider public and customer perception. Participation in cryptocurrencies can be a double-edged sword: while innovative, it can raise concerns among conservative clients or board members, especially after an exchange collapses or an institution is involved in an event such as a DeFi hack or scandal. Many institutions are cautious and participate in behind-the-scenes pilots until they are confident in risk management. Reputational risk also extends to unpredictable regulatory narratives — negative comments from officials about DeFi can cast a shadow on the institution involved.
Legal and accounting challenges: There are unresolved legal questions about the ownership and enforceability of digital assets. If a bank holds a token representing a loan, is it legally recognized as owning the loan? The lack of established legal precedent for smart contract-based agreements adds to the uncertainty. In addition, the accounting treatment of digital assets (although improving, with new standards allowing fair value accounting until 2025) is subject to historical issues (such as impairment rules) and regulators’ high capital requirements for cryptocurrencies (the Basel proposal considers unbacked cryptocurrencies to be high risk). These factors may make holding or using cryptocurrencies financially unattractive from a capital perspective.
Faced with these challenges, many institutions have taken a strategic risk management approach : starting with small pilot investments, using subsidiaries or partners to test the waters, and proactively working with regulators to achieve favorable outcomes. They are also contributing to industry alliances to develop compliant DeFi standards (e.g., proposals for identity-embedded tokens or “DeFi passports” for institutions). Overcoming these barriers will be critical to broader adoption; the timeline will depend largely on regulatory clarity and whether crypto infrastructure continues to mature to meet institutional standards.
Outlook for 2025-2027: The integration of TradFi and DeFi
Looking ahead, the degree of integration between traditional finance and decentralized finance may take multiple trajectories in the next 2-3 years. We outline the bullish , bearish and base cases :
Bull Scenario (Rapid Consolidation): In this bullish scenario, regulatory clarity improves significantly by 2026. The US is likely to pass a federal law delineating the crypto asset class and establishing a regulatory framework for stablecoins and even DeFi protocols (perhaps with a new charter or license for compliant DeFi platforms). With clear rules, major banks and asset managers will accelerate their crypto strategies - offering crypto trading and yield products directly to clients and using DeFi protocols for certain back-end functions (such as overnight funding markets using stablecoins). Stablecoin regulation in particular could be a catalyst: if dollar-backed stablecoins are officially approved and insured, banks could start using them at scale for cross-border settlement and liquidity, embedding stablecoins into traditional payment networks. Improved technical infrastructure also plays a role in the bull scenario: Ethereum’s planned upgrades and layer 2 expansion make transactions faster and cheaper, and strong custody/insurance solutions become standard. This enables institutions to deploy to DeFi with lower operational risk. By 2027, we could see a large portion of interbank lending, trade finance, and securities settlement occurring on hybrid decentralized platforms. In a bull case, even ETH staking integration will become common - for example, corporate treasuries will use staked ETH as a yield asset (almost like a digital bond), adding a new asset class to institutional portfolios. The bull case heralds convergence : traditional financial companies not only invest in crypto assets, but also actively participate in DeFi governance and infrastructure , contributing to shaping a regulated, interoperable DeFi ecosystem to complement traditional markets.
Pessimistic Scenario (Stagnation or Contraction): In the pessimistic scenario, regulatory crackdowns and adverse events severely hinder integration. Perhaps the SEC and other regulators double down on enforcement without providing new avenues — effectively banning banks from open DeFi and limiting crypto exposure to a handful of approved assets. In this scenario, institutions will still mostly be on the sidelines by 2025/2026: they stick with ETFs and a few permissioned networks, but they avoid public DeFi due to legal concerns. Moreover, one or two high-profile failures could undermine sentiment — for example, a major stablecoin crash or systemic DeFi protocol hacks that cause losses to institutional players, reinforcing the narrative that the space is too risky. In the pessimistic scenario, global fragmentation increases: markets such as the EU and Asia continue to integrate crypto, but the US lags behind, causing US companies to lose competitiveness or lobby against crypto to create a level playing field. If TradFi sees DeFi as a threat and lacks viable regulation, they may even actively fight back against DeFi, which could lead to slower innovation (e.g., banks only promote private DLT solutions and prevent customers from doing on-chain finance). Essentially, the pessimistic scenario is that the prospects for TradFi-DeFi synergies stagnate and crypto remains a niche or secondary area for institutions until 2027.
Base case (gradual, steady integration): The most likely scenario lies somewhere between these two extremes — continued gradual integration, with incremental but firm progress . Under this base case outlook, regulators will continue to issue guidance and some narrow rules (e.g., stablecoin legislation could be passed in 2025, and the SEC could refine its stance, perhaps exempting certain institutional DeFi activities or approving more crypto products on a case-by-case basis). No sweeping reforms, but each year brings some clarity. In turn, traditional financial institutions cautiously expand their crypto businesses: more banks will offer custody and execution services, more asset managers will launch crypto or blockchain-themed funds, and more pilots will go live connecting banking infrastructure to public chains (particularly in areas such as trade finance documentation, supply chain payments, and secondary market trading of tokenized assets). We might see consortium-led networks selectively interconnect with public networks — for example, a group of banks could run a permissioned lending protocol that connects to a public DeFi protocol for additional liquidity when needed, all under agreed-upon rules. In this scenario, stablecoins might be widely used as a settlement medium by fintechs and some banks, but might not yet replace the main payment networks. ETH staking and crypto yield products are starting to appear in institutional portfolios on a small scale (e.g. pension funds putting a few basis points of their allocations into yield-bearing digital asset funds). By 2027, in the base case, TradFi x DeFi integration will be significantly deeper than it is today — measured by 5-10% of trading volume or lending happening on-chain in some markets — but it will still run parallel to the legacy system rather than a full replacement. Importantly, the trend is upward: the success of early adopters convinces their more conservative peers to test the waters, especially as competitive pressure and client interest grow.
Key drivers
In all scenarios, several key factors will influence outcomes. Regulatory developments are critical— any move that provides legal clarity (or, conversely, new restrictions) will immediately change institutional behavior. The development of stablecoin policy is particularly critical: secure, regulated stablecoins could become the backbone of institutional DeFi transactions. Technology maturity is also a driver—continued improvements in blockchain scalability (via Ethereum Layer 2 networks, alternative high-performance chains, or interoperability protocols) and tooling (better compliance integration, private trading options, etc.) will provide institutions with greater comfort. In addition, macroeconomic factors may also play a role: if traditional returns remain high, the sense of urgency to seek DeFi returns may be lower (reducing interest), but if returns decline, DeFi's additional return points may become attractive again. Finally, market education and historical record will also play a role—every year that DeFi protocols demonstrate resilience and every successful pilot (e.g., a large bank successfully settles $100 million over blockchain) builds trust. By 2027, we expect the discussion to shift from “whether” to use DeFi to “how” to use DeFi, just as cloud computing has gradually been adopted by banks after initial skepticism. In general, the next few years may see traditional finance and decentralized finance move from cautious engagement to deeper cooperation, and the speed of development will be determined by the interaction between innovation and regulation.
