As a seasoned analyst with over two decades of experience navigating the complexities of traditional finance (TradFi) and emerging technologies, I find myself both intrigued and cautiously optimistic about the burgeoning relationship between TradFi and the crypto-verse.
The financial sector has experienced a significant shift in perspective towards Bitcoin (BTC) and blockchain technology, which were once met with skepticism. This year alone, we’ve seen the Securities and Exchange Commission (SEC) grant approval for both Ether and Bitcoin Spot Exchange-Traded Funds (ETFs), even from prominent asset manager BlackRock. At the same time, State Street, a major international bank, is planning to introduce a stablecoin, while Robinhood, a popular trading platform in traditional finance (TradFi), has broadened its cryptocurrency services.
In a more relaxed expression: Although overly dominant traditional institutions in cryptocurrency advancements might threaten the industry’s decentralized values, many web3 supporters welcome Traditional Finance involvement since it could speed up adoption. However, connections between the conventional financial system and the growing digital asset market are gradually strengthening.
Even though there’s a surge in popularity for Exchange-Traded Funds (ETFs) based on DeFi, the rise of tokenized real-world assets, and an increasing interest in blockchain technology, many conventional financial institutions remain hesitant to interact directly with these networks. This reluctance doesn’t stem from fears of legal action by the SEC or concerns about cryptocurrency volatility; instead, it’s rooted in the fundamental way banks function.
Banks, acting as reliable custodians of their customers’ assets and providers of financial services, often face challenges when interacting with public blockchains due to the visibility of transaction histories and other sensitive data. Although transparency is a key principle in web3 and helps foster trust among decentralized groups, it could potentially disclose confidential customer information within these institutions.
Financial institutions must constantly adhere to local regulations regarding their operations, which can make interacting with public blockchains challenging and limit adaptability in the fast-paced digital asset market. Consequently, banks often choose to engage with blockchain technology and cryptocurrencies through private blockchains, as these offer advantages for privacy and compliance matters.
Private networks create a regulated setting for banks, where they can explore and potentially adopt blockchain technology, even tailoring it for their specific payment systems. However, this setup excludes most DeFi solutions, apps, and mechanisms from these institutions, as well as any liquidity held on public blockchain platforms, thereby limiting the scope of interaction between them.
Financial institutions might consider using cross-chain bridges, sidechains, layer-2s, and similar technologies to increase their involvement in cryptocurrency markets. Yet, these alternatives may reintroduce the same security risks and vulnerabilities that initially prompted financial institutions to opt for private blockchains instead.
Smaller financial institutions, who often lack the resources for calculated risk-taking, find themselves in a challenging position when attempting to devise strong digital asset strategies that cater to the increasing demands from both retail and institutional clients. Fortunately, emerging projects are aiming to fill these gaps and expand the range of institutions participating in blockchain technology.
Vixichain is working on a solution addressing current issues faced by institutions, with its layer-1 blockchain set to debut in early 2023. This blockchain allows institutions to work seamlessly with cryptocurrencies and decentralized finance (DeFi) within legal boundaries. The network connects the regulatory requirements of traditional systems with the innovative possibilities offered by web3 through a stablecoin created using Non-Fungible Token (NFT) technology. Although it may seem unusual, this approach ensures transparency and authenticity while incorporating the benefits of both public and private blockchains.
Vixichain aims to construct a secure, privately-managed blockchain network in which financial institutions serve as verifiers. This setup empowers users to gather quotes from various active nodes and select the suitable partner for transaction processing. Meanwhile, Vixichain’s NFT stablecoin simplifies user interaction within the broader cryptocurrency market.
People involved in web3 recognize the importance of mainstream acceptance, and partnering strategically with traditional finance (TradFi) offers more advantages than disadvantages. For instance, knowledge in compliance, risk management, and increased liquidity are only a few of the perks TradFi offers. To effectively tap into TradFi’s interest in digital asset marketplaces, innovative approaches are needed that find a harmonious blend between the benefits offered by both public and private blockchain networks.
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2024-09-21 14:35