Traditional banks have long been wary of crypto and DeFi, but thanks to increased regulatory clarity, endorsements from TradFi heavyweights and growing client demand, it’s clear that crypto is here to stay.

But simply “accepting” crypto might not be enough to stay relevant. Banks need to fully engage with the right partners to help develop next-generation financial infrastructure, otherwise the fintech and blockchain sectors will move on without them.

While some believe that DeFi models are destined to supplant the traditional ones, it’s an unlikely scenario. Current market infrastructures and regulatory safeguards are there for handling institutional liquidity and customer protection.

Instead, we believe that the real opportunity is where the two worlds will enhance each other.

You're reading Crypto Long & Short , our weekly newsletter featuring insights, news and analysis for the professional investor. Sign up here to get it in your inbox every Wednesday.

What can banks do?

Many banks are realizing that crypto is more than just a new asset class. For them, it’s an opportunity to retain and attract clients who are drawn to crypto’s higher returns and diversification opportunities. Here’s a few things to consider:

• Diversify product offerings: Banks can defend their current assets under management, diversify their offerings and win new business by attracting the next generation of crypto-native clients.
• Staking-as-a-service: Banks can leverage their trusted infrastructure to offer customers new revenue streams. By working with the right technology partner, staking can be offered to both institutional and retail clients.
• Tokenization: Tokenized products backed by real-world assets can offer new revenue streams and unlock markets that were otherwise limited.
• Blockchain-powered settlement: Blockchain-powered, multi-asset settlement networks can help banks meet and exceed the T+1 settlement standard that many major players struggle with.

Trust - a bank’s most valuable asset

In a crypto market where many services lack the much-needed stability and security that traditional investors seek, banks can use this to their advantage.

When FTX crashed in 2022, we saw many investors flocking to regulated entities in desperate need for a safe haven, including our own. It was a powerful reminder how trust trumps everything in times of turmoil.

As crypto regulations take further shape, we’re likely to see many more investors continue to move their funds into entities they can trust. Naturally, they want to feel safe and get all the upside, even if these entities are pricier.

CeDeFi – a likely scenario

For now, DeFi products will continue to compete with traditional products, but it is likely that the two will blend at some point. By leveraging DeFi’s technical components and CeFi’s KYC and AML requirements, we are looking at “CeDeFi”-based models becoming the most appropriate form that will be the underlying infrastructure of future finance.

Banks should take advantage of DeFi’s features, offering flexibility, more efficient systems and innovative financial products that can offer customers new opportunities for yield.

At the same time, TradFi or CeFi, brings hundreds of years of experience in financial systems governance and customer servicing, providing the necessary protection and guardrails needed to bring institutional clients and a new wave of customers onboard.

That said, we think that financial institutions – like banks – able to bridge both worlds, and are prepared to do so, will find many exciting opportunities in the evolving future finance landscape – but they must act sooner rather than later.

Disclaimer: sygnum.com/disclaimer-2/

Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.