Disclosure: The perspectives and opinions articulated here are solely those of the author and do not reflect the views or opinions of crypto.news’ editorial team.
Traditional finance has undergone a significant transformation from its earlier skeptical stance towards Bitcoin (BTC) and blockchain technology. Earlier this year, we saw the SEC endorse spot Ether and spot Bitcoin ETFs, including those from top asset manager BlackRock. At the same time, State Street, a prominent global bank, intends to introduce a stablecoin, and TradFi trading platform Robinhood has broadened its crypto operations.
Although highly centralized institutions might pose challenges to the decentralized principles of the crypto industry, many web3 advocates welcome TradFi’s involvement as it would boost adoption. Nonetheless, connections between the traditional financial sector and the developing digital assets market are advancing consistently.
Despite the rise of prominent ETFs, increasing interest in DeFi, and the emergence of tokenized real-world assets, many financial institutions remain hesitant to directly engage with various blockchain networks. This caution stems not from fears of SEC litigation or the volatility of cryptocurrencies; instead, it relates to the operational nature of banks.
As reliable intermediaries that manage client assets and offer financial services, many banks struggle to interact with public blockchains, where transaction histories and other sensitive data are visible to the public. While the principles of transparency and openness are fundamental to web3 and foster trust within decentralized communities, this can risk revealing private client information within these institutions.
Compliance with local regulations is crucial for financial institutions, complicating their engagement with public blockchains and limiting their adaptability in the swiftly changing digital asset landscape. Consequently, banks wishing to participate in blockchain and crypto often opt for private blockchains due to considerations of privacy and compliance.
Private networks create a controlled atmosphere for banks, enabling them to explore blockchain technology within a secure and compliant domain, allowing for the gradual addition of partners. While this is beneficial for institutions seeking to understand blockchain or potentially utilize it for their payment systems, it restricts access to the vast majority of DeFi products, applications, and protocols, along with any liquidity locked in public blockchain protocols.
Indeed, there are cross-chain bridges, sidechains, layer-2 solutions, and other tools that financial institutions could use to gain additional exposure to crypto markets. However, these alternatives may bring the same security challenges and vulnerabilities that led institutions to choose private blockchains initially.
This situation leaves financial institutions, particularly smaller banks with limited resources to take prudent risks, in a difficult position when attempting to establish comprehensive digital asset strategies that meet the increasing demands of both retail and institutional clients. Nevertheless, new initiatives are emerging to bridge these divides and expand the participation of institutions in the blockchain space.
Vixichain, for instance, is creating a solution targeting this challenge facing institutions. Its layer-1 blockchain, slated for launch early next year, will permit institutions to engage with crypto and DeFi in a compliant manner. The network connects legal frameworks and the innovative opportunities of web3 by utilizing a stablecoin grounded in NFT technology. While this approach may seem unconventional, it allows for traceability and authenticity verification, merging the optimal characteristics of both public and private blockchains.
The goal of Vixichain is to construct a private blockchain wherein financial institutions act as validators. This setup enables users to obtain quotes from available nodes and select the appropriate partner for processing payments, while its NFT stablecoin streamlines access to the broader crypto landscape.
Participants in the web3 sector recognize the significance of mainstream adoption, and strategically partnering with TradFi offers more benefits than drawbacks. For instance, the experience in compliance, risk management, and added liquidity are just a few advantages that TradFi contributes. The secret to capitalizing on TradFi’s interest in participating in digital asset markets lies in the development of inventive solutions that balance the advantages of both public and private blockchains.
