Why is Wall Street still wary of DeFi?

Translation: Blockchain in Vernacular

Key Takeaways:

• DeFi’s “grey areas” pose challenges to Wall Street’s traditional regulatory framework.
• BlackRock and Franklin Templeton are leading the way in blockchain government securities.

1. Current Development

The top minds on Wall Street are going all out to tokenize real-world assets, but they are facing a fork in the road: should they proceed with caution, or venture into the Wild West of cryptocurrency?

The financial world is undergoing a blockchain transformation, and Wall Street is at the forefront of digitizing traditional assets. But as banks and asset managers move further into this new frontier, they face a difficult choice: stick with the secure, controlled environment 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 is a series of projects running on the blockchain, providing borrowing, trading and other "currency Lego"-style services without any central authority at the helm. Sounds cool, right? But it's also a regulatory minefield that has left traditional finance players seriously uneasy.

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

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

2. Tokenization may reach US$30 trillion within ten years

But interestingly: according to the predictions of Standard Chartered Bank, the tokenization market may reach a staggering US$30 trillion by 2034. Currently, we see approximately $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 national debt, some big companies are already making a splash. BlackRock and Franklin Templeton launch government securities fund running on blockchain. Through their BUIDL and BENJI Token, they have attracted nearly $1 billion in assets.

While some on Wall Street are treading cautiously on private blockchains, die-hard cryptocurrency fans 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 his BENJI Token. They hope these digital assets will eventually be traded across the entire crypto ecosystem. Its head of digital assets, Roger Bayston, has even discussed with regulators how to make stablecoins work in the DeFi space while everyone follows the rules.

BlackRock is not sitting idly by 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 and allows people to cash out quickly.

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

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

Even regulatory agencies are becoming interested. Singapore’s financial regulator has let 24 major banks experiment with tokenization in its sandbox. Goldman Sachs, meanwhile, conducts bond-related operations on its private blockchain.

The million-dollar question (or rather the 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 banks and the new world of cryptocurrency are increasingly blurred, almost like a crack in the matrix. Whether that's exciting or scary may depend on where you stand on Wall Street.

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