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Institutional DeFi set to take off in one to three years
Early successes highlight potential to change market structures and operating models
The Asset 24 Jun 2024

Decentralized finance (DeFi) – basically financial services such as borrowing, lending or investing, and involving digital assets, that use smart contracts built on blockchain technology – is attracting growing interest from the traditional financial industry.

But while DeFi, by its very nature, is taking place outside the ambit of a centralized financial intermediary, such as banks and mutual funds, the financial services industry is looking at its potential for application to institutional use cases.

The road to using DeFi for regulated financial activities is now under construction, and over the next one to three years, what is referred to as institutional DeFi is widely expected to take off, say Deutsche Bank and Northern Trust in a newly released industry whitepaper.

The paper was authored by Boon Hiong Chan, Deutsche Bank’s industry applied innovation lead and head of securities and technology advocacy for Asia-Pacific, and Dan Sleep, Northern Trust’s head of digital assets and financial markets for Asia-Pacific.

It examines the evolution of DeFi and its driving forces, demystifies its frequently used terms, and considers how it will shape the future for financial institutions.

While progress to date has been cautious due to the continuously evolving macroeconomic and regulatory landscape, early successes that showcase the potential of DeFi to change market structures and operating models when adopted by financial institutions, have been achieved, the paper asserts.

Its early implementation can be seen in tokenized funds in asset management.

Good level of maturity

Institutional DeFi is an enabler that can give rise to a new financial paradigm that reduces historical industry costs, potentially without incurring significant new ones, depending on the blockchain type and other choices made.

Mike Clarke, global head of product management, securities services, at Deutsche Bank, says: “While we are currently in the early stages of institutional DeFi adoption, the technology and regulatory frameworks have reached a good level of maturity. We are at the stage where we can achieve the balance between new regulatory compliance and new inherent operating models.

“By engaging with regulators and the industry, closely collaborating with clients and strategic partners, and undertaking our own projects, we can work together to encourage further institutional adoption of DeFi and create sustainable growth.”

Justin Chapman, global head of digital assets and financial markets at Northern Trust, adds: “The next stage of the digital markets and product evolution in the DeFi space is certainly an exciting one. Leveraging on the inventory of capabilities we continue to develop; we see significant opportunities to innovate and deliver benefit across the value chain…  

“Substantive progress will require a continual focus on data, risk management and governance and through collaboration with strategic partners to develop an interoperable and connected ecosystem to bring all this to life.”

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Hugh Wu
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