Why Wall Street remains wary of DeFi

Key Takeaways:

• DeFi’s “gray area” poses a challenge to Wall Street’s traditional regulatory framework.

• BlackRock and Franklin Templeton are leading the way in blockchain government securities.

1. Development status

Wall Street’s top minds are going all-in on tokenizing real-world assets, but they face a fork in the road: proceed with caution or venture into the Wild West of cryptocurrency?

The financial world is undergoing a blockchain transformation, with Wall Street at the forefront of digitizing traditional assets. But as banks and asset managers move further and further into this new frontier, they face a difficult choice: stick with the safe, controlled environments they know, or venture into the uncharted wilderness of decentralized finance (DeFi).

For those who don't know, DeFi is like self-driving financial services in the crypto world. It's a series of projects running on the blockchain that provide lending, trading, and other "money Lego" services without any central authority at the helm. Sounds cool, right? But it's also a regulatory minefield that makes traditional finance people seriously uneasy.

Steven Hu, a digital asset expert at Standard Chartered Bank, bluntly stated that for banks, fully decentralized tokenization is neither "realistic nor ideal." They need a controller to ensure that everything is legal and compliant.

“A centralized authority is needed to ensure the authenticity, uniqueness and proper use of the underlying assets,” Hu said.

2. Tokenization could reach $30 trillion within a decade

But here’s the interesting part: According to Standard Chartered, the tokenization market could reach a staggering $30 trillion by 2034. Currently, we see about $13.2 billion in real-world assets being tokenized, with private credit leading the way at $8.4 billion, followed by U.S. Treasuries.

When it comes to Treasuries, some big players are already making a splash. BlackRock and Franklin Templeton have launched government securities funds that run on the blockchain. Through their BUIDL and BENJI Tokens, they have attracted nearly $1 billion in assets.

While some on Wall Street are treading cautiously on private blockchains, crypto diehards are betting big on public networks. Nana Murugesan of Matter Labs is convinced that the real action will take place on public networks.

Franklin Templeton has big dreams for its BENJI Token. They hope that these digital assets will eventually be traded across the entire crypto ecosystem. Its head of digital assets, Roger Bayston, has even been talking to regulators about how to make stablecoins work in the DeFi space while everyone follows the rules.

BlackRock isn’t sitting on the sidelines, either. Its digital currency market fund has raised $527 million since March. Carlos Domingo of Securitize Markets attributes its success to the fact that the fund is available on Ethereum, allowing people to cash out quickly.

3. DeFi is the Wild West, and there are too few cowboys (for now)

So why does all this matter? OpenEden’s Jeremy Ng put it this way: “DeFi is the horse pulling the tokenized real-world asset (RWA) wagon.” In other words, without all this crazy on-chain activity, no one would care about tokenizing boring traditional assets.

Even regulators are starting to get interested. Singapore’s financial regulator has allowed 24 major banks to experiment with tokenization in its sandbox. Meanwhile, Goldman Sachs is conducting bond-related operations on its private blockchain.

The million-dollar question (or trillion-dollar question) is whether Wall Street will fully embrace DeFi or keep its distance. Franklin Templeton’s Bayston believes that sooner or later, everyone will realize the huge potential of public blockchains to improve market efficiency.

The lines between traditional banking and the new world of cryptocurrency are blurring, almost like cracks in the matrix. Whether that’s exciting or scary probably depends on where you stand on Wall Street.