The transfer of crypto infrastructure from crypto natives to traditional finance is currently taking place, driven by a combination of push and pull forces. Traditional institutions are entering the crypto space because they see it as a business opportunity and want a share of this promising asset class. At the same time, institutional investors are pulling them in because they have lost trust in crypto native intermediaries. This shift is not motivated by ideology or a desire to promote an alternative financial system, but rather by practical considerations.
In recent news, it was reported that CME was on the verge of replacing Binance as the top futures exchange. This development is not surprising, considering Binance’s opaque and lightly regulated nature. Investors and institutions looking to short a crypto asset prefer to do so with a traditional financial institution that has a diversified balance sheet. Trust and familiarity play a significant role in this decision-making process. Onboarding practices at large institutions are well-established and easily understood by their peers, thanks to decades of securities law amendments. In contrast, crypto-only institutions may not inspire the same confidence.
The market for centralized stablecoins has evolved beyond instant settlement and de-risking, as these features are no longer unique selling propositions. Transparency, attested backing, openness about banking capabilities, liquidity, and yield have become the most important elements. DeFi stablecoins, on the other hand, are carving out their own niches and seeking competitive advantages. The latest generation of stablecoin protocols aims to pass through yield to users, essentially importing traditional finance returns into DeFi. This trend challenges the dominance of USDT (Tether) and USDC (Circle), as DeFi explores external yields and traditional institutions explore regulated issuance.
The logical outcome of these developments is the convergence of crypto natives and traditional finance institutions. Crypto-native businesses are becoming more TradFi-like, while traditional institutions are reinforcing their operations in the crypto space. For example, Coinbase, a crypto-native company, has gone public and now offers futures to retail customers. FRAX, a DeFi stablecoin, generates yield by investing in short-dated US treasury bills and repo agreements. JP Morgan has created its own private blockchain for settlement purposes and handles $1 billion daily. PayPal, with over 400 million active users, has entered the stablecoin market through a partnership with NYDFS-regulated Paxos. Nomura and Standard Chartered have invested in their own digital assets custody services. Additionally, BlackRock and Fidelity have filed for spot Bitcoin ETFs. In the UK, industry stalwarts have registered as crypto-asset firms under the AML/CTF regime. Even regulators are adapting to this changing landscape.
The institutional embrace of crypto is not a threat to the original vision of digital assets but rather a catalyst for further development and innovation. Institutions bring legitimacy, liquidity, and diversity to the crypto space, creating a more robust and resilient ecosystem that benefits all participants. The future of crypto is not a zero-sum game, but a collaborative and creative endeavor that has the potential to transform the world of finance.
In conclusion, the transfer of crypto infrastructure from crypto natives to traditional finance is driven by both push and pull forces. Traditional institutions see a business opportunity in crypto and want a share of this promising asset class. Institutional investors, on the other hand, are pulling them in because they have lost trust in crypto native intermediaries. This shift is not motivated by ideology but by practical considerations. The convergence of crypto natives and traditional finance institutions is the logical outcome of these developments. This collaboration brings legitimacy, liquidity, and diversity to the crypto space, creating a more robust and resilient ecosystem. The future of crypto is not a zero-sum game but a collaborative and creative endeavor that can transform the world of finance.