OneFi: The convergence of TradFi and DeFi reshaping finance
The financial landscape is undergoing a seismic shift as Traditional Finance (TradFi) and Decentralized Finance (DeFi) begin to converge—giving rise to a new paradigm, ‘OneFi’.
This convergence highlights the growing influence of DeFi on TradFi and the role of regulation in uniting the two. Ultimately combining established financial systems with Distributed Ledger Technology (DLT) innovation will shape the future of finance, says Marcus van Abbé, Head of Market Infrastructures at R3.
The Crypto boom and market projections
The cryptocurrency market has experienced explosive growth in recent years, with projections suggesting significant expansion in the coming decade.
Currently, the global cryptocurrency market size stands at approximately $3tn, with analysts forecasting that it could reach between $5tn to over $11tn by 2030. This optimistic outlook is fuelled by heightened interest from institutional investors, who are expected to increase their exposure to crypto assets from the current average of 1.5% to 7% of their portfolios by 2027.
Additionally, the number of active cryptocurrency wallets continues to rise, underscoring growing market participation. However, despite these positive trends, challenges remain. The market’s decentralized nature, while appealing to many, complicates regulatory oversight and contributes to persistent security concerns for both institutional and retail traders.
DeFi innovations meet TradFi scale
DeFi is an emerging system born out of the cryptocurrency world. It seeks to create a peer-to-peer (P2P) financial system that leverages DLT to enable businesses and individuals to transact directly with one another without reliance on traditional financial institutions to reduce costs and transaction times.
The DeFi space continues to innovate at a breakneck pace, introducing tools like liquid restaking tokens, which enable users to earn yields on their cryptocurrency holdings and automated market makers.
While the total market cap of DeFi remains relatively small, its transaction volumes and turnover rates are impressive, with daily turnover comparable to the US equity market and unparalleled global user adoption.
Applying this velocity to traditionally illiquid asset classes could unlock significant value. As we witness the growth of digital assets and currencies, it’s worth considering Geoffrey Moore’s “Crossing the Chasm” theory. A valuable framework for understanding the adoption of innovative technologies like DeFi and tokenized securities.
This model divides the market into five segments: Innovators, Early Adopters, Early Majority, Late Majority, and Laggard—the crucial “Chasm” lies between the Early Adopters and the Early Majority.
Although, early adopters push the boundaries of financial services, the majority tend to adopt new innovations once the market matures with clear regulations in place.
In DeFi, early adopters play a critical role in shaping the regulatory frameworks that TradFi will eventually adopt, acting as a testing ground for new technologies. Early adopters of DeFi innovations in the TradFi world drive innovation and competition within the industry through the introduction of new products and services.
Tokenized assets and digital currencies: Early adopters’ phase
Tokenized assets are still firmly in the early adopter’s phase, and despite the growing interest from major financial institutions, adoption remains relatively limited. For instance, digital bond issuances in recent years represent less than 1% of the $20tn issued globally in long-term fixed-income instruments.
Although the current value of tokenized assets like bonds, money market funds, real estate, and commodities remains small compared to traditional markets, we’re witnessing foundational and transformative steps poised to reshape the financial landscape.
DLT is being integrated into existing capital markets with minimal notice. For instance, HQLAx can work alongside current custodians to facilitate the movement of traditional securities. Meanwhile, Spunta has been successfully reconciling fiat cash balances among 94 Italian banks for the past four years. Additionally, SSimple has partnered with EquiLend to streamline settlement instructions. These live-in production workflows are increasingly merging and creating DLT touchpoints with current systems.
The ISSA report “DLT in the Real World” found that DLT’s strategic importance to the securities sector had increased by 10% since last year with 340 firms in the survey citing DLT as high on strategic agenda.
Moreover, estimates of the global DLT industry is growing between the $1-3tn range in 2030 with compound annual growth rate (CAGRs) generally between 50-90%.
The private sector is not the sole driver of early adoption. As decentralized finance (DeFi) has expanded, governments are increasingly interested in tokenization. Nearly 60 countries have incorporated digital assets and currencies into their strategic roadmap, prioritizing them as a key component of their fintech strategies. This demonstrates that government agendas focused on digitization are strongly linked to increased cryptocurrency activity within their markets.
At the top of many of these agendas are Central Bank Digital Currencies (CBDCs), with 98% of central banks exploring them and half already at advanced stages.
CBDCs are a form of tokenized central bank money. Unlike traditional banking systems, CBDCs enable firms to borrow from a central bank outside of operational hours and to settle instantaneously 24/7, supporting greater collateral mobility.
One benefit of using tokenized assets like CBDCs is smart contract functionality, in which processes can be automated using blockchain technology. Presently, most Central Securities Depositories’ (CSD) resources are used to record, reconcile, and verify transactions on behalf of their member firms.
However, all of this could be automated using DLT-based infrastructure, enabling CSDs to focus on higher-margin services like collateral optimization or analytics.
Regulatory tailwinds and headwinds
Widespread interest from monetary authorities is lending significant credibility to digital currencies and the broader tokenization movement. As regulations take shape, we’re seeing the emergence of token taxonomies and classifications of different crypto-related activities. Many jurisdictions are adopting a “same activity, same regulation” approach, aligning crypto oversight with existing financial rules—while requiring licenses for custodians and trading venues and existing TradFi licenses.
Here, we see how the convergence of TradFi and DeFi is resulting in a new OneFi paradigm. Leveraging existing regulatory frameworks, albeit with some additional DLT-specific legislation around things like property laws or smart contract enforceability, has spurred the adoption of DeFi innovations.
Regulatory sandboxes like the UK’s Digital Securities Sandbox and the European DLT Pilot Regime are operational, catalyzing changes across key regulations, such as the Central Securities Depositories Regulation (CSDR) and Markets in Financial Instruments Regulation (MiFIR).
They both focus on activities within the lifecycle of security and with a strong focus on collateral mobility with DLT, have confirmed that the security should be treated the same and can be used as collateral, securities financing, or repo transactions.
All the while initiatives like the UK Finance Regulated Liability Network (RLN) bring together DeFi and TradFi players to collaborate on new forms of financial market infrastructure.
However, the regulatory environment for cryptocurrencies remains fragmented globally, with different jurisdictions taking varied approaches:
- 35.5% of jurisdictions globally have implemented comprehensive regulatory frameworks
- 43.3% still lack regulations
- 8.8% have established anti-money laundering (AML) frameworks
- 12.6% have imposed bans on crypto activities
Markets in Crypto Assets Regulation (MiCA) explicitly exempts crypto-asset services that are provided “in a fully decentralized manner without any intermediary” from its scope.
Although MiCA aims to exempt fully decentralized DeFi services, the practical application of this exemption remains challenging due to the lack of clear definitions and the complex nature of DeFi protocols.
DeFi projects will need to carefully assess their structures and operations to determine their regulatory status under MiCA. With increased regulatory clarity on DeFi and DLT activities, firms can operate across traditional and decentralized markets. This clarity is crucial for fostering innovation and cross-market operations.
The emergence of OneFi will span new regulations, evolutions in workflows, shifting roles, and emerging business lines, many of which interoperate with existing securities frameworks and will not be captured by the size of market cap, but which will rewrite operations and rulebooks for financial markets.
The road to OneFi
As we look to the future, OneFi represents a transformative paradigm that brings together the best of TradFi and DeFi. This convergence opens a world of opportunities, from increased financial inclusion and enhanced liquidity to more efficient capital markets and innovative financial products.
The synergy between TradFi’s established infrastructure and regulatory compliance with DeFi’s technological innovation and accessibility has the potential to create a more robust, transparent, and inclusive financial ecosystem.
As regulatory frameworks evolve and institutional adoption increases, we can expect accelerated growth in tokenized assets, cross-chain interoperability, and hybrid financial services that seamlessly blend traditional and decentralized elements.
Although challenges will remain, particularly regarding regulatory harmonization and technological standardization, the momentum behind OneFi is undeniable.
The implementation of new technologies and the establishment of regulations will take time. However, these regulations are currently changing and being shaped by firms that are embracing the technology. The ability to understand how DLT impacts businesses and how to effectively provide feedback to regulators will play a critical role in determining the future landscape of capital markets.
Traditional financial institutions that fail to embrace innovative capabilities and offer digital products risk losing market share in an increasingly digital financial landscape. Their legacy systems and processes may struggle to keep pace with the speed and efficiency offered by DLT-based solutions.
On the other hand, DeFi protocols that cannot access the deep liquidity pools of traditional markets or provide the same level of regulatory assurance and institutional-grade services will face significant hurdles in scaling their operations and achieving mainstream adoption.
The key to success in this new paradigm lies in bridging these two worlds effectively. Those who can successfully navigate this convergence—be they forward-thinking traditional institutions or DeFi protocols that can meet regulatory, interoperability and institutional requirements—will be well-positioned to shape the future of finance.
As we map recent global activity in this space, it’s clear that OneFi is not just a trend, but a fundamental shift that will redefine how we interact with money and assets in the digital age, requiring adaptation and innovation from all players in the financial ecosystem. Those who adopt innovation early will reap the most benefit from this exciting development.
