Are TradFi and DeFi on course for convergence or collision? (27th September 2022)

Future of Finance will convene a panel at R3’s CordaCon event on September 27 at 14.10 to 14.40

What is it about?

The digitisation or tokenisation of financial assets is no longer about cryptocurrencies only. Nor is it the preserve of future-minded millennials who grew up playing computer games. Established financial institutions are investing in the digital transformation of financial services by blockchain.

The ISSA DLT in the Real World survey[1], which covered 148 financial institutions, found one third of respondents were live with a blockchain-based service already; one third were building a blockchain-based service; and a sixth had a blockchain-based pilot scheme in progress.

The same survey found that the initial driver of those projects – namely, client demand to invest in or trade cryptocurrencies – was giving way to expectations that bonds, privately managed assets and funds will be issued, traded and held in tokenised forms in the near future.

For the stock exchanges, investment banks, custodian banks and central securities depositories (CSDs) that have responded to the survey over the last three years, blockchain-based services have become steadily more important as a source of product innovation and efficiency gains.

“DLT” is of course slang for the blockchain variant established institutions are said to prefer: private permissioned networks. Yet a recent survey by OMFIF found that 40 per cent of 21 sovereign, supranational and government bond issuers were happy to issue on to public blockchain networks.

In addition, governments and regulators around the world are putting in place the crucial ingredient that regulated financial institutions insist is present in any market they enter: the regulation of digital asset activities and the regulation of participants in digital asset markets.

Importantly, the size and reach of the constituency of cryptocurrency issuers, service providers and investors that recognise the weight of money that regulated institutional capital and regulated institutional practices might bring to shaping the future of financial markets is growing.

Lastly, the persistent failure of blockchain technology to overcome its limitations of speed, scalability and – in its purist forms, where smart contracts and oracles hold sway – security, continues to feed the belief that blockchain can never adapt successfully to institutional needs without modification.

In short, the cryptocurrency markets and the conventional financial markets, and the parallel universes of the public, permissionless blockchain networks and the private, permissioned DLT networks, appear to be converging. If they are, they will eventually be indistinguishable.

But they may not be. Aspects of the blockchain vision of fully decentralised finance (DeFi) – such as consumer ownership of personal data and digital identities – remain radically incompatible with the centralised intermediary model of traditional finance (TradFi). Stable compromise may prove elusive.

Whatever happens in the long term, in the short term both the blockchain pioneers and the established financial institutions are condemned to search for a stable form of coexistence, in which the incumbents are not completely disrupted and nor are the innovators completely suborned.

[1]https://issanet.org/content/uploads/2022/07/DLT-in-the-Real-World_ISSA-survey-2022_VX-Key-Findings_.pdf

Accordingly, the panel will consider the following questions:

Why should TradFi digitise – to save money? To save capital? To develop new products and services?
Is blockchain still too slow and unscalable (and insecure) to be useful in financial markets?
Is the distinction between public, permissionless blockchain networks and private, permissioned blockchain networks still a useful concept?
Has DeFi proved “disintermediation” does not work?
Are regulators aiming at “convergence”?
Must a digital wallet evolve into a digital data store and eventually into a digital identity?
Can decentralised finance co-exist with centralised finance or must it eventually overthrow the prevailing system?
Will tokenisation save the cryptocurrency industry?
How can atomic settlement (which requires pre-funding) and settlement on T+2 be reconciled?
How easy it for DeFi and TradFi to collaborate?

The panel

Richard Crook, COO, BCB Group

https://www.linkedin.com/in/rickcrook/

Todd McDonald, Chief Strategy Officer, R3

https://www.linkedin.com/in/toddvmcdonald/

Gilbert Verdian, CEO, Quant

https://www.linkedin.com/in/gverdian/

Michele Curtoni, Head of Strategy, Six Digital Exchange

https://www.linkedin.com/in/mcurtoni/

When is it being held?

Tuesday 27 September at 14:10 to 14:40

Where is it being held?