Institutional DeFi: Accelerating Adoption and Advancements in Financial services

DeFi has become a game-changer in the financial services industry by providing a decentralized, transparent, and secure environment that eliminates intermediaries and allows for more efficient transactions. The DeFi Talents program is run by the Frankfurt School Blockchain Center . It is a great experience of learning from fellow mentors and Defi Talents who are building the Defi Project. One interesting topic I came across is “Institutional DeFi” and liked the interaction of DeFi & TradFi/CeFI which I believe going to next revolution in the Financial services sector. Here is my blog on the “Institutional DeFi – Adoption Advancements in Financial services ” based on my experience with DeFi Talent program, projects and current market research Report from Consensys 摩根大通 星展银行 BLOCKDATA Broadridge Monetary Authority of Singapore (MAS) SIX Bank for International Settlements – BIS .

What is DeFi?

Decentralized finance, or DeFi, is a system of financial applications and protocols that operate on a decentralized, blockchain-based network. It became important because it offers several advantages over traditional finance, including greater financial freedom, increased transparency and security, lower transaction fees, and more opportunities for investment and earning. DeFi is also accessible to anyone with an internet connection, making it an inclusive and global financial system.

What is Institutional DeFi?

'Institutional DeFi' refers to blockchain-based financial products that have been tailored to the requirements of institutions that have strict compliance needs. While DeFi initially emerged as a grassroots movement focused on providing decentralized financial services to individuals and small investors, it has increasingly gained interest from institutional players who are seeking to leverage the benefits of blockchain technology to improve their operations and offer new services to their clients.

Combining the power of decentralized finance with appropriate safeguards can unlock value for issuers, investors, and financial firms

Why Institutional DeFi?

·??????Large companies have a high desire to participate in DeFi but have faced challenges deploying assets due to compliance hurdles.

·??????Major DeFi products are rolling out KYC'ed versions of their products to cater to the demand and ensure participation with known counterparties.

·??????New DeFi products are coming to the market bringing the benefits of borderless liquidity to real-world assets.

Traditional Financial services companies are leveraging Decentralized technologies to traditional financial services due to the below factors:-

1.?Improved security and compliance: Institutional investors typically require more robust security and compliance measures than retail investors. DeFi protocols may also need to adopt regulatory compliance standards to meet institutional investors' legal requirements.?

2.?Increased liquidity: Institutional investors typically invest large amounts of capital and require high levels of liquidity to enter and exit positions efficiently.

3.?Enhanced transparency and data analytics: Institutional investors require more comprehensive data and analytics to make informed investment decisions. Transparent and accurate data on transaction volumes, liquidity, and trading activity, as well as offer more advanced analytics tools to help investors assess risk and identify investment opportunities.?

Institutional DeFi Use Cases

• Asset management: Institutional investors can use DeFi protocols to manage their digital assets more securely and efficiently. DeFi protocols can provide real-time tracking of asset performance, automated rebalancing, and other features to help investors optimize their portfolios.?
• Tokenization: DeFi protocols can facilitate the tokenization of traditional assets such as real estate, art, and other illiquid assets. This can unlock new investment opportunities for institutional investors and increase liquidity for asset owners.?
• Payments and remittances: DeFi can provide faster and cheaper cross-border payments and remittances by leveraging the speed and efficiency of blockchain networks.
• Identity verification: Institutional DeFi can also be used for identity verification and KYC (know-your-customer) procedures, providing a secure and decentralized way to verify user identities without the need for centralized intermediaries
• Settlement and clearing: DeFi protocols can improve settlement and clearing times by eliminating the need for intermediaries such as custodians and clearinghouses. This can reduce costs and increase efficiency, particularly for cross-border transactions.?
• Trading: Institutional investors can use DeFi protocols to trade cryptocurrencies and other digital assets in a more secure, transparent, and efficient manner. DeFi protocols can also provide access to new liquidity pools and enable cross-chain trading.?
• Lending and borrowing: DeFi lending protocols can provide institutional investors with a new source of income by allowing them to lend their digital assets to borrowers in return for interest. Borrowers, on the other hand, can use DeFi protocols to access liquidity without the need for a traditional credit score or collateral.?

Institutional Defi is here now, not tomorrow!

Here is the list of Institutional Defi projects is driving DeFi adoption in financial services sector: -

• Broadridge’s DLT repo platform transacts $1 trillion a month: In mid-2021,?Broadridge ?launched its?Distributed Ledger Repo (DLR) ?solution, quickly achieving $31 billion in average weekly volumes. That figure is now $50 billion daily or a trillion dollars a month. So far,?UBS ?and?Societe Generale ?are two banks that have confirmed they are active on the platform, and it’s expected the number of participants will reach double digits this year, with three currently onboarding.
• In November 2022, DBS?became one of the first banks ?to use DeFi protocols for foreign exchange (FX) and government securities transactions through?Project Guardian , a collaborative initiative set up by the Monetary Authority of Singapore (MAS), DBS, J.P. Morgan, and Marketnode. MAS’s Project Guardian to test the feasibility of applications in asset tokenization and DeFi while managing risks to financial stability and integrity. Project Guardian will help MAS build the digital asset ecosystem framework, enhance and develop relevant policies, and provide direction on the technology standards. Onyx is paving the future of Institutional DeFi through Project Guardian, a collaborative initiative led by the Monetary Authority of Singapore (MAS) to explore the economic potential and value-adding use cases of asset tokenization, including tokenized deposits, on the public blockchain.
• In July 2022, BNP Paribas Securities Services announced it was working with two fintech, Fireblocks, and METACO, to develop its digital custody offering. Also in July, BNY Mellon and Goldman Sachs settled the first securities lending transaction using a DLT platform provided by the fintech firm HQLA.
• On November 2022 UBS issued the first?digital bond ?listed and publicly tradable on the classic SIX stock exchange, and the digital assets exchange?SIX Digital Exchange (SDX) . This bond is?listed and tradeable at both SIX Digital Exchange and SIX Swiss Exchange. Due to a single international securities identification number (ISIN) for the digital bond (“single-ISIN solution”), the handling of digital bonds is intended to be greatly simplified as there is no longer a need for a “twin bond” in the traditional world.
• ?Project Mariana :?The SNB, together with the BIS Innovation Hub, the Banque de France, and the?Monetary Authority of Singapore (MAS), ?are using DeFi protocols to explore automated market makers (AMM) for the cross-border exchange and settlement of hypothetical Swiss Franc, Euro and Singapore Dollar wholesale?CBDCs .
• ?Project mBridge : The Hong Kong Monetary Authority, Bank of Thailand, People’s Bank of China, and the Central Bank of the UAE ran a pilot to support real-time, peer-to-peer, cross-border payments and foreign exchange transactions using CBDCs.

Future of Institutional Adoption of Defi

Institutional DeFi is a rapidly evolving and exciting area of innovation in the financial services industry. While still in its early stages, DeFi has already disrupted the traditional financial system by providing a decentralized, transparent, and secure alternative to existing financial services. As institutional players explore ways to leverage the benefits of DeFi to improve their operations and offer new services to their clients, we are likely to see a surge in adoption and innovation in this space.

Institutional DeFi has the potential to unlock new possibilities for financial services, including greater transparency, accessibility, and efficiency. As the DeFi ecosystem continues to evolve, we are likely to see more innovative use cases emerge, driving further adoption of this disruptive technology by institutional players. The future of institutional DeFi will augment TradFi with a streamlined exchange of assets between the two systems. There will be a few hurdles along the way, but with high funding, close collaborations, innovation, product iterations, and regulatory alignment, DeFi will carve its place in the financial ecosystem of institutions.

Reference:

https://www.blockdata.tech/blog/general/how-institutional-defi-is-evolving

https://www.oliverwymanforum.com/future-of-money/2022/Nov/institutional-defi.html

https://www.ledgerinsights.com/broadridges-dlt-repo-dlr-1-trillion/

https://www.jpmorgan.com/onyx/content-hub/institutional-defi.htm

https://richturrin.substack.com/p/defi-in-the-spotlight-institutional?utm_source=profile&utm_medium=reader2

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