Finding blockchain harmony to encourage TradFi participation

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Traditional finance has made a U-turn from the industry’s initial dismissive response to Bitcoin (BTC) and blockchain technology. Earlier this year, we saw the SEC approve spot Ether and spot Bitcoin ETFs, including one from leading asset manager BlackRock. At the same time, major global bank State Street is planning to launch a stablecoin, and TradFi trading venue Robinhood has expanded its crypto operations.

While the heavily centralized institutions that play an outsized role in crypto developments may pose risks to the industry’s decentralized ethos, many web3 enthusiasts are open to TradFi participation as it will accelerate adoption. Despite this, the ties between the broader financial world and the emerging digital asset sector are steadily advancing.

Despite high-profile ETFs, growing interest in DeFi, and tokenized real-world assets, many financial institutions remain wary of directly interacting with various blockchain networks. This is not due to SEC lawsuits or concerns about crypto’s inherent volatility, but rather the nature in which banks operate.

As trusted intermediaries that manage clients’ assets and provide financial services, most banks have difficulty interacting with public blockchains where transaction history and other private data are available for anyone to see. While transparency and openness are core web3 principles and are used to build trust within decentralized communities, this can lead to the disclosure of private client information within institutions.

Financial institutions will always need to comply with local regulatory frameworks, which makes interacting with public blockchains complex and limits flexibility in the rapidly evolving digital asset space. Therefore, banks that want to interact with blockchain and crypto for one reason or another often choose to do so through private blockchains due to privacy and compliance considerations.

Private networks provide banks with a controlled environment, allowing them to experiment in a compliant and secure space, and over time, more partners can join. While this is good for institutions looking to understand blockchain technology or perhaps implement it to facilitate their own payment systems, it blocks access to the vast majority of DeFi products, applications, and protocols. It also blocks access to any liquidity stored on public blockchain protocols.

Sure, there are cross-chain bridges, sidechains, layer-2s, and other solutions that financial institutions can leverage to gain a little more exposure to the crypto markets. However, these solutions run the risk of introducing the same security threats and vulnerabilities that led financial institutions to choose private blockchains in the first place.

This leaves financial institutions, especially smaller banks that lack the resources to take calculated risks, struggling to create the most robust digital asset strategies to meet the growing demand of both retail and institutional clients. However, new projects are working to bridge these gaps and expand the scope for institutions to enter blockchain.

Vixichain, for example, is developing a solution to this problem that institutions are facing. Its layer 1 blockchain, scheduled to launch early next year, allows institutions to interact with crypto and DeFi in a way that is compatible. The network bridges the gap between legal frameworks and the innovative potential of web3 by using a stablecoin built on NFT technology. While it may sound unusual, this provides traceability and verifies authenticity, combining the best aspects of public and private blockchains.

Vixichain’s goal is to create a private blockchain where financial institutions act as validators. This allows users to receive quotes from existing nodes and choose the relevant partner to process payments, while the NFT stablecoin facilitates easy access to the broader crypto ecosystem.

Those in the Web3 industry understand the value behind mainstream adoption, and strategically partnering with TradFi provides greater rewards than risks. For example, compliance, risk management, and additional liquidity experience are just a few of the benefits TradFi brings to the table. The key to capitalizing on TradFi’s desire to participate in digital asset markets requires innovative solutions that provide a balance between the advantages of both public and private blockchains.