The integration of cryptocurrencies and traditional finance has seen some hard-fought victories. One notable example is the approval of the first spot Bitcoin (BTC) exchange-traded funds (ETFs) in the United States on January 10. This approval by the U.S. Securities and Exchange Commission (SEC) could potentially lead to increased capital inflows and greater institutional participation in the crypto market. However, cryptocurrencies have yet to make significant inroads into the banking sector and the majority of financial institutions.
It is important to remember the initial reluctance of the SEC in approving the ETFs. The SEC had previously rejected multiple spot Bitcoin ETFs from various challengers, with the first refusal dating back to July 2013. Eventually, with the involvement of large fund managers from the traditional finance world, such as BlackRock, and the conclusion of legal actions surrounding Bitcoin ETFs, the SEC granted approval.
In a statement on January 10, SEC Chair Gary Gensler made it clear that while they approved the listing and trading of certain spot Bitcoin ETP shares, they did not necessarily endorse Bitcoin. The approval, although begrudging, marked the end of ten years of denials.
Despite these victories, the crypto industry still faces numerous challenges in gaining acceptance in the traditional finance world. The union between old money and crypto remains difficult. Bob Ras, co-founder of Coreum, a blockchain protocol developing smart tokens for tokenized securities and real estate, explained that regulators have long been skeptical of crypto projects, even those aiming to adopt traditional industry standards.
Ras experienced this skepticism firsthand during the development and launch of Sologenic, a platform for trading tokenized stocks. The plan was to obtain a MiFID license, which is a security broker-dealer license in Europe. However, due to the intransigence of European regulators, Sologenic had to offer tokenization solutions for institutions only, bypassing the need for a MiFID license.
Apart from regulatory challenges, another barrier between traditional finance and decentralized finance (DeFi) arises from differing philosophies on how finance should operate. Sologenic initially ran on the XRP Ledger blockchain but eventually built Coreum, a layer-1 blockchain with smart contract functionality designed to comply with institutional demands. During the development phase of Coreum, the team had to consider why the merging of TradFi and blockchain remained difficult. The answer was not simple. Ras highlighted that there is currently no blockchain that is 100% focused on enterprises and compliant with banking standards like ISO 20022, with AML and KYC on-chain.
Furthermore, institutions are cautious about adopting blockchain technology due to the lack of checks and balances. Financial institutions need some level of control to ensure compliance with regulations. Therefore, providing administrative-level powers for regulated financial entities became the best way forward for Coreum.
While the approval of a spot Bitcoin ETF indicates that the stock market is becoming more receptive to crypto, the financial sector still poses challenges. Many in the sector remain skeptical of cryptocurrencies. The European Central Bank recently issued a report on the possibility of a spot Bitcoin ETF in Europe, titled “ETF approval for bitcoin – the naked emperor’s new clothes,” which reflects the skepticism of the authors.
Changing the mindset of the traditional finance sector is a significant challenge. Although TradFi and crypto are becoming more connected, there is still much work to be done.