07-04-2025
Surveying The Landscape Of Institutional DeFi
A term that would have been unthinkable only a few years ago, 'Institutional DeFi' is widely predicted to be one of the defining themes of the digital asset sector in 2025 – and perhaps even the rest of the decade. If that seems far-fetched, just ask JPMorgan. The banking behemoth recently published a report subtitled 'The Next Generation of Finance?' into the potential benefits of adopting decentralized financial protocols for the TradFi sector
One point that stands out from the report is a relatively strict definition of institutional DeFi as 'the application of DeFi protocols to tokenized real-world assets, combined with appropriate safeguards to ensure financial integrity, regulatory compliance, and customer protection,' going on to note an explicit exclusion – institutional players participating in 'crypto DeFi.'
According to this definition, JPM's own tokenization efforts, based on its Kinexys Digital Assets platform, which is used to offer intra-day repo settlement, would be included. (It's worth noting that tokenized repo settlements are projected to reach $1 trillion in the coming years, according to Citi.)
However, any institutional activity in the established DeFi sector –including the $60 billion surge in DeFi activity recently observed by institutional custodian Fireblocks – would be excluded.
On the one hand, crypto DeFi still operates in a regulatory no-man's land, meaning many institutions will understandably be keen to distance themselves for compliance reasons. Various efforts have been underway to solidify regulator's understanding of DeFi, and to recommend policy frameworks that can balance innovation and investor protection. Examples of such include IOSCO's 'Final Report with Policy Recommendations for Decentralized Finance (DeFi)', and the Crypto Council for Innovation's 'Key Elements of an Effective DeFi Framework', in which I was a contributor.
So in time, regulatory clarity for DeFi will happen. Just not yet.
With that said, crypto DeFi is the very place where the innovation happens as the barriers between institutions and crypto-native DeFi are increasingly hard to define as banks increasingly look to the benefits of public decentralized infrastructure to issue their tokenized assets.
For instance, a given blockchain ecosystem such as Polygon or Aptos is currently being used in multiple ways. JPMorgan itself has experimented with permissioned iterations, while other firms such as Franklin Templeton and BlackRock are using the public architecture for issuing their tokenized money market funds. All alongside an established ecosystem of native crypto DeFi apps.
For institutional DeFi and native DeFi to play together, safeguards will be a non-negotiable necessity for TradFi players. However, a key question is: How eager are the innovators in DeFi willing to go along with the idea of rules and regulations? A ruling in the eleventh hour of the Biden administration that would compel DeFi platforms to implement KYC checks was met with predictable howls of dismay from industry insiders, indicating that resistance is still strong in some quarters.
Even if such a ruling is now obsolete under the new administration, it's safeguards such as these that would potentially unlock institutional access to crypto DeFi. And according to the recent JPMorgan report, 'the prize for innovators who hone [institutional DeFi] for use in the world's trillion-dollar finance industry could be substantial.'
A key argument espoused by the crypto and broader tech sector is that regulation stymies innovation. However, the reality is that the institutional DeFi opportunity is already stimulating innovation and industry development towards the kind of safeguards that institutions would demand.
One of the often-discussed areas where DeFi falls short is in compliance with anti-money laundering and counter-terrorist financing regulations. Thus, permissioned DeFi solutions were among the first to emerge, heavily supported by crypto-native institutional providers such as Ripple Custody and Fireblocks, among others.
However, this is only part of the equation explaining why take-up has been slow. Data privacy is also a compliance requirement at odds with the public nature of blockchain transactions and the ease with which large transactions can be traced. The extension of zero-knowledge technologies into blockchain privacy, along with the development of innovations such as iExec's decentralized confidential computing, which uses hardware-based trusted execution environments, could bridge the gap between public blockchains and institutional privacy standards.
Another bridge is needed between institutional models for organization, governance, and conduct, and the decentralized finance segment, where governance is managed through token ownership, and often, there is no figurehead by design. However, at this point in its evolution, the crypto sector arguably has its own institutions in the form of exchanges like or the other giants that also have a foot in the decentralized segment via their associated blockchain projects, such as the Cronos chain.
These established firms, which have often courted institutional clients themselves, will have an important role to play in bringing together institutions and DeFi from their respective sides of the divide.
The benefits of institutional DeFi are becoming too great to ignore, but the institutions themselves are invariably cautious about excessive risk, meaning they are keen to keep crypto DeFi at arm's length. However, as the source of the innovation, DeFi developers have an opportunity to share in the benefits of institutional DeFi, assuming they remain open to the kind of safeguards that will make it possible for TradFi to collaborate.
