The Bank for International Settlements (BIS) says that the merging of cryptocurrency and traditional finance (TradFi) is accelerating, thanks to the increasing use of tokenized real-world assets (RWAs).
Tokenization Bridges the Gap
Essentially, RWAs are traditional assets like stocks or real estate represented as tokens on a blockchain. This is creating a stronger link between the decentralized finance (DeFi) world and the traditional financial system. The BIS predicts that if this trend continues, more and more assets will be traded within DeFi, potentially changing its very nature.
DeFi Goes Mainstream?
The BIS suggests that DeFi could become much more mainstream. More institutions might participate, and currently unique DeFi infrastructure like decentralized exchanges (DEXs) could become commonplace. However, this integration also presents challenges. The BIS points out that the connections between TradFi and DeFi are complex and not always obvious. For example, the recent banking crisis partly involved the indirect exposure of some US banks to depositors heavily invested in crypto, a factor that surprised many.
Risks and Research Needed
Because of these evolving connections, the BIS is calling for more research into the regulation of this growing relationship. They highlight two key areas needing further investigation:
- DeFi and TradFi Integration: Understanding the potential systemic risks if DeFi becomes deeply intertwined with TradFi, especially in crucial sectors like banking and insurance.
- Stablecoin Risks: Analyzing the role of stablecoins in fueling DeFi growth and the dangers of their instability, both within DeFi and its impact on TradFi.
The BIS emphasizes the need to proactively address potential stability risks and prevent any negative “spillovers” from one system to the other. In short, as crypto and traditional finance become more intertwined, careful monitoring and regulation are crucial.
