The traditional financial system (i.e. TradFi or Traditional Finance) is based on ideas that date mostly back to the early 20th century. Banking is perhaps the oldest continuing financial service used throughout the world. These industries have had to adapt to recent changes, first with the computer age followed by the Internet and information age.
Paradigm shifts have transformed finance from analog to digital, yet the industry has usually been slow to adapt to changes. As institutions, certain policies and structure have created established practices. As a result, when something new comes along there is usually some form of resistance.
The adoption of blockchain technology has faced perhaps the stiffest resistance from banks and financial institutions. While most banks have embraced the Internet and digital transformation, they have not fully accepted or adopted blockchains. The takeaway here is that blockchain is less understood regarding its purpose and application.
TradFi have started exploring blockchain applications (e.g. Chase JPM Coin, VISA Ethereum gas payments, Japan bank plan to issue stablecoins). Despite these efforts, there is lack of any real world application used in mainstream finance. They have not replaced their existing databases with a blockchain, and that is not the purpose of this innovative technology.
It seems that TradFi has been left behind in the last decade, as a parallel financial system began to emerge. It is evolving into Web3 and DeFi (Decentralized Finance), which brings use cases for blockchains. It is not too late for TradFi, because with a growing market this is the moment of opportunity to enter this space.
The answer to why TradFi did not get in early with blockchains has to do with cryptocurrency. It has become associated with blockchains, and TradFi does not view crypto as a valid means of payment or legal tender. This would complicate their regulations and policies, regarding accounting. This is also not considered in line with governments.
It does not help that the media has reported negatively on cryptocurrency. Reports about scams have put the use of blockchains in a bad light. However if you look at the TradFi space in general, scams also occur and even more frequently than with crypto and blockchains. It is important that advisories are given to educate people about these scams and how to avoid them.
Blockchains were also viewed as something that TradFi institutions cannot control because they follow a decentralized infrastructure. A blockchain is not controlled by any organization or government, because it was designed to be open to the public. This reveals plenty of information which banks cannot hide.
TradFi has to look at why a blockchain is used in the first place. It is for transparency, immutability and provability of a transaction that does not require intermediation. Use cases include the establishment of ownership, verification of public data and countering manipulation in the auditing of financial records.
You do not need to put unencrypted private data in a blockchain since existing database solutions are more effective for that. What you put in a blockchain are cryptographically hashed data which can be used for verification without requiring permission from a trusted party.
When looking at blockchains, view it from a technology perspective and not from the cryptocurrency lens. Blockchains are not cryptocurrency, but cryptocurrency need blockchains. Blockchains are what allow cryptocurrency to be issued without the need for a centralized entity or government.
The TradFi space can still catch up to what is happening with blockchains. It continues to evolve and develop from the backing of a community. It should not be viewed as speculating on cryptocurrency prices, but realizing the utility and value it brings. It is time to recognize the benefits of a blockchain and how this can help deliver financial services to the mainstream.
Despite being total opposites, there is a common ground that TradFi has with blockchains. That is the need to implement new technologies that can best serve finance. Once TradFi can realize the value of using blockchains, then we can expect these changes to shape the future of fintech.
(Cover Photo: Credit: Expect Best)
Disclaimer: This is not financial advice and is the author's opinion. The information provided is for reference and educational purposes only. Please DYOR to verify information.
