Not about feelings, just about efficiency: Why does traditional finance only need “blockchain” and not “DeFi”?
By Christian Crowley and Pyrs Carvolth
Original title: Traditional finance doesn't want decentralized finance (DeFi); it wants blockchain.
Many people thought traditional finance would embrace DeFi, and the two eventually merged into some kind of elegant hybrid. The truth is even harsher: Wall Street only wants to use blockchain to reduce costs, improve efficiency, and seize customer relationships, but it will never relinquish control. This is not a compromise, but a carefully designed architectural choice that is spawning a new category — programmable financial infrastructure.
An almost classic future story circulates in the crypto industry: DeFi and traditional finance will merge, unlicensed liquidity will meet the distribution capacity of institutions, and eventually create an elegant hybrid that combines the best of the two — the new system will replace the old one.
It's a reassuring story. But it's basically wrong.
The more honest version is: as long as blockchain can make existing businesses of traditional finance better, it will be used. Not because it embraces decentralization, but because it's a compelling cost-cutting story — the technology just cuts costs, improves settlement, expands distribution, and tightens its control over customer relationships.
This means that institutions aren't integrating with DeFi. Instead, they are selectively using parts of DeFi that meet their own operating constraints and discard those that don't; they are reconfiguring DeFi around institutional needs. The results are unlikely to be like traditional finance, or DeFi today. We're beginning to see the emergence of a new category, built on the blockchain track, but optimized for institutional constraints: programmable financial infrastructure.
This dynamic is likely to evolve as regulatory frameworks mature. Legislation like the CLARITY Act may eventually make it easier for agencies to directly access unlicensed systems. But no matter what becomes legally possible, the risk attitude of traditional finance will not be reset overnight. Institutions will still adopt technology from a perspective that matches cost, risk, control, and operations — which is why this presents the industry with two opportunities rather than one.
The first opportunity is to help agencies adopt the infrastructure they are ready for today. Every primitive used by the institution — from atomic settlement to programmable money to tokenized collateral — is validating the technology, building shared tracks, and bringing real transaction volume and capital to the chain.
The second opportunity is to continue building an open, crypto-native financial system that institutions are not ready to use.
It's not a competitive bet. They can and should exist in parallel, and if done well, each enhances the other. Open networks and ecosystems will continue to produce the primitives, markets, and innovations that institutions will eventually adopt. If both are successful, integration will naturally occur — not because one system completely replaces the other, but because both are increasingly dependent on the same underlying infrastructure.
What is traditional finance actually doing
Traditional finance uses a primitive phrase and requires two things at the same time: improving cost, risk, or distribution, and being compatible with control and accountability. Primitives discarded by the agency — open access, pseudonym, immutable execution — passed the first test but failed the second. That's why the adoption pattern is predictable rather than arbitrary, and why builders can use it as a design test. In other words, if a feature can only deliver value by removing institutional control, no matter how elegant it is, it will almost certainly be reshaped or rejected.
Let's test some primitives. Atomic settlement narrows the gap between transactions and finality, eliminates counterparty risk, and releases collateral that institutions have parked for unsettled transactions. Shared ledgers turn the biggest hidden cost in the back office — reconciliation — into something you don't need to do. Programmable money allows coupon payments, deposit recovery, and corporate actions to run as code rather than a series of manual instructions. AMM curve math, stripped of its permissionless shell, re-emerged as a pricing engine for net value in on-chain forex and tokenized money markets.
Each improved the numbers on the income statement or eliminated an line of operational risk and associated costs, yet none required institutions to believe in decentralization. So let's explain exactly what's happening with J.P. Morgan's institutional deposit-licensing blockchain, or BlackRock and Franklin Templeton's tokenized money market funds: these aren't corporate experiments with DeFi. They're using blockchain to do what they already do—settling interbank payments, managing fund subscriptions, and distributing interest-bearing tools—but using better channels. These deployments use blockchain's technical attributes (programmability, transparency, atomic settlement) and deliberately discard the attributes that make native DeFi work (open access, pseudonym, and trustless execution).
It's not a failure or compromise. It's a thoughtful architectural choice, and it tells us a lot about where this is going.
Different buyers, different rules
It would be a mistake to assume that institutions are only using a larger distribution channel for existing DeFi infrastructure. Agencies evaluate agreements differently from cryptographic native users. As organizations consider software vendors, infrastructure partners, operational risk, compliance controls, and long-term ownership of critical systems, they follow standard operating procedures. As a result, success in DeFi doesn't automatically translate into success in institutions.
Businesses seldom buy the “best” technology. They buy technology that best fits existing workflows, risk models, procurement processes, etc.
Any technology that enters an institutional environment with high levels of supervision, risk management, and avoidance of responsibility will be shaped by that environment. This has happened on the Internet (corporate firewalls, private intranets). This has happened to cloud computing (private cloud, VPC, FedRAMP). This is happening with AI (internal deployment, data residency requirements, model governance). Blockchain is no different.
The reconfiguration occurs along two axes:
Compliance: KYC, AML, sanctions screening, investor accreditation, and regulatory reporting requirements are non-negotiable for most agencies. Unlicensed systems do not natively adapt to these requirements. Institutions need the ability to freeze assets, reverse transactions, and identify counterparties. DeFi was not originally designed around these requirements, and adapting to them often requires meaningful architectural changes. This is likely to evolve. For example, CLARITY may make it easier for agencies to meet regulatory requirements while accessing unlicensed systems. But today, most institutions must evaluate blockchain infrastructure through the lens of control, accountability, and operational risk.
Enterprise value delivery. This axis is often underestimated. Institutions are not adopting blockchain because they believe in a permissionless principle. They use it because it can reduce costs, reduce reconciliation friction, create new distribution channels, or embed them more deeply into customer relationships. The value proposition must be expressed in these terms, otherwise it won't go through procurement.
Stablecoins are probably the clearest example. Banks, payment providers, and fintech companies are increasingly seeing them as useful settlement infrastructure because they allow dollars to move faster across networks and geographic regions. But few people have embraced the broader philosophy of permissionless finance. They use programmable dollars because they're useful, not because they're trying to rebuild the financial system around DeFi principles.
The evolution of Circle is a case in point. Arc reflects how blockchain infrastructure is increasingly being packaged for institutional buyers: an emphasis on compliance, operational control, trusted counterparties, and integration into existing workflows rather than permissionless access and composability. The value proposition isn't about not requiring a license per se. Instead, faster settlement, global reach, and improved capital efficiency, delivered in a form that institutions can actually use.
Even organizations like SWIFT are increasingly framing blockchain through this perspective. Their efforts in tokenized asset interoperability are not an attempt to replace existing financial institutions. They are an attempt to improve how existing institutions coordinate with each other using the SWIFT network. This pattern has been repeated over and over: blockchain adoption is strengthening established financial networks rather than replacing them.
This is how powerful technology evolves when it meets a large established market.
Two opportunities for builders
At the industry level, it would be a mistake for everyone to give up one opportunity for another. At the company level, it would be a mistake to try to pursue both at the same time.
Institutional adoption and open networks can reinforce each other at the ecosystem level. But for most teams, they're still fundamentally different businesses. Building an organization requires understanding procurement, compliance, control, channel partners, and long sales cycles. Building an open network requires optimizing developers, fluidity, composability, and network effects. Customers, distribution models, product requirements, and success metrics are often completely different.
That doesn't mean one chance is better than the other. It just means that founders should clearly know which market they are serving, and be aware that what unites them is the following trajectory: the public chain acts as a neutral settlement layer.
There is no contradiction between cooperating with institutions and building a neighboring financial system. If done right, each one makes the other more valuable. The licensing layer brings transaction volume, legality, and capital; the open layer continues to produce the primitives that the licensing layer will adopt next. When fusion comes, it takes place in orbit—not a surrender to another through one system.
Public chains are likely to become increasingly important settlement tracks, even as applications built on them increasingly require licensing.
Built for programmable financial infrastructure
When building for this new programmable financial infrastructure, there are two approaches to consider: building or adapting an existing product from scratch.
Consider a network like Canton. Instead of adapting existing DeFi infrastructure, they are specifically designed around institutions' requirements for privacy, compliance, and controlled interoperability. The goal is not to bring banks to DeFi. Instead, blockchain-based coordination is used while retaining the governance, confidentiality, and operational control required by the agency.
Not every successful institutional strategy needs to be rebuilt from scratch. Morpho, for example, is taking the opposite approach. Instead of abandoning its DeFi primitives, Morpho is focusing on making them easier for institutions and asset issuers to use them. For example, Apollo's ACRED fund uses Morpho as part of its on-chain lending strategy, pairing DeFi's native lending primitives with institutional-grade distribution, compliance, and fund structures. The result is neither pure DeFi nor a completely isolated institutional stack. It's a model for institutions to selectively adopt an existing cryptographic infrastructure while packaging it in a way that meets their own requirements for control, compliance, and distribution.
This new category is tailored to institutional constraints. It draws nutrients from DeFi, but operates in a more permissioned, more compliant way, and is therefore necessarily different from what exists today.
Some teams, like Morpho, have successfully adapted cryptographic native infrastructure for institutional use cases. But builders shouldn't mistake this for the default playbook. An agency is a unique customer base with unique requirements. In many cases, designing for these requirements from the beginning will prove more effective than adapting products originally built for an open network.
An opportunity to continue building in DeFi
The innovations that institutions are adopting today did not originate within banks, asset managers, or existing financial infrastructure. They emerge from open networks, where builders are free to experiment with new market structures, coordination mechanisms, and financial primitives.
This difference is important. Institutions are not the main source of innovation in the industry: the licensing layer is usually downstream from the open tier.
This brings us to a more important strategic point: if our industry is too focused on selling to banks and asset managers, we run the risk of mistaking one big buyer category for an entire opportunity. Traditional finance is an important customer. But it's not the only one.
Designing for agency requirements is a legitimate and worthwhile pursuit, but it's just a driveway, not the whole road. Companies that last will be those that are clear about who they are building for. Institutional adoption may be a big opportunity, but it's not just an extension of DeFi. Success in one market is no guarantee of success in another.
If you're building for an agency, fully embrace it. Don't assume that crypto's native appeal automatically translates into enterprise adoption. Understand customers, understand the buying process, and intentionally structure around institutional requirements.
If you're building for an open web, keep doing that. Don't give up on your vision just because agencies are the loudest buyers on the market today.
Remember: these are complementary, not competitive. A proven innovation to adapt, commercialize, and expand. Another one found them. A version of this technology will almost certainly be part of the financial pipeline of existing traditional financial systems. But that's not the only future being built. The open web remains the industry's most important source of experimentation and innovation, and many of the primitives that will shape tomorrow's institutional infrastructure may first emerge there.
Traditional finance isn't adopting DeFi. It selectively uses parts that match its pattern. The opportunity for builders is not to chase every market at once, but to understand which one they are building for. and execute accordingly. The future may indeed run on institutional infrastructure, but many of its most important innovations will continue to emerge from open networks.
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