Banks to Blocks: Exploring TradFi/ DeFi Collaboration

In this first episode of a two-part series, Ashurst’s Simon Williams, Counsel for Ashurst digital assets and financial innovation team, is joined by Thomas Hyun, Director of Cryptocurrency Compliance at Forensic Risk Alliance (FRA), to examine how collaborations between traditional finance (TradFi) and decentralised finance (DeFi) are moving from ‘proof of concept’ to ‘business as usual’. They discuss current partnership models, compliance and regulatory considerations, pace of change and what to expect next.  

The power of partnerships  

This episode gives listeners an introduction to digital assets and distributed ledger technology (DLT) – the tech behind blockchain systems - and explains why it is important to financial markets.  

In the conversation, Simon discusses, “The huge potential of DLT for the financial services sector is now generally and widely recognised, including by central banks and regulators, as is the value that DLT brings to both digital natives and to traditional finance.”

Simon and Thomas explore the growing trend of practical collaborations between digital natives (DeFi) and traditional finance (TradFi) and dig into the topic of banks working with crypto services and digital platforms offering traditional finance products.  

Simon discusses the increase in crossover trends that Ashurst has noticed, “Whilst DLT operations are obviously baked into digital natives, a growing trend that Ashurst is seeing is the crossover of these DLT operations - between digital natives and traditional finance - so traditional finance can leverage and operationalize DLT, and vice versa, so that digital natives can utilise attributes of traditional finance.”

Drivers of collaboration  

Speed, cost efficiencies and streamlined processes are motivating both TradFi and DeFi to work together, rather than in isolation. Simon and gives some real-life case studies of how TradFi banks are now integrating crypto services into their offerings. He also talks of how stablecoin platforms are working with traditional clearing or custody infrastructure. And how partnerships between digital asset firms and established financial institutions are used to expand liquidity and services.  

“TradFi/ DeFi partnerships are no longer a case of ‘when’ and ‘how’, not ‘if and increasingly these collaborations will become ‘business as usual’”, stated Simon.  

Digital asset products are maturing and becoming more mainstream, their success hinges on how well traditional players and digital native firms partner – particularly when it comes to due diligence and risk.

_{Thomas comments, “We’re seeing real utility, real use-cases offering products which look and feel like traditional finance and providing these capabilities to the masses – however this will be dependent on the growing collaboration across TradFi and how these institutions evaluate and maintain these relationships.”}  

Risk management & compliance play a key role  

Strong risk management practices and compliance controls are critical considerations in making these collaborations viable and scalable.

_{Thomas shares his thoughts on what action he thinks needs to be taken, “Institutions really need to level up their due diligence and risk assessment processes on their outsourced arrangements to ensure that these are risk-based, they’re fit for purpose and specifically tailored for the digital asset offering.”}

Thomas and Simon conclude that partnerships are now in full swing and here to stay, these collaborations will become BAU and the pace of change will continue to accelerate.  

To listen the podcast, click here.

To listen to part two of the podcast, click here.