TradFi institutions are adopting blockchain to improve their existing operations, not because they have embraced decentralization, says venture capital firm a16z in its latest report.
The technology helps reduce operating costs, speed up settlement, expand distribution and ‘tighten’ control over customer relationships, making it a practical business tool rather than an ideological shift.
TradFi’s Blockchain Push
Institutions are not included in DeFi as it currently exists. Instead, a16z stated that they are only adopting the elements of DeFi that fit their regulatory, operational, and risk requirements, while leaving behind features that do not. This selective approach reshapes blockchain-based finance as something different from both traditional finance and current DeFi.
The result is an emerging form of programmable financial infrastructure designed to meet institutional needs while using technology as its foundation.
According to a16z, initiatives such as JPMorgan’s permissioned blockchain for institutional deposits and tokenized money market funds from BlackRock and Franklin Templeton are not examples of institutions embracing DeFi. Instead, they use blockchain to enhance existing financial services such as interbank settlements, fund subscriptions and yield-bearing products.
They take advantage of blockchain features such as programmability, transparency, and atomic settlement, while deliberately avoiding core principles of DeFi such as open access, pseudonymity, and reliable execution. The focus is on making traditional financial infrastructure more efficient, rather than on adopting decentralized finance in its original form.
Crypto must look beyond Wall Street
The blockchain capabilities now being adopted by institutions were first developed in open, permissionless ecosystems, rather than within banks or traditional financial firms. In these environments, developers could test new financial models and infrastructure. As a result, institutional adoption is largely based on innovations that originate in the open crypto ecosystem.
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The report argued that the sector should not focus too heavily on banks and asset managers simply because they are large customers. While traditional financial institutions represent an important source of demand, they do not define the full potential of the sector, and opportunities outside of TradFi should not be overlooked.
“Designing for institutional requirements is a legitimate and valuable activity, but it is only one lane, not the whole road.”