Institutional DeFi: the New Dawn of Securities Infrastructure

Feb 26, 2023

Some of the largest participants in finance are creating systems to take advantage of incorporating decentralized finance (DeFi) protocols into the financial industry, through the use of tokenized securities. DeFi protocols are automated applications on a blockchain that can handle financial services like trading, lending and borrowing, and asset management, while decreasing the need for intermediaries to be manually involved. Given the resulting reductions in cost and time, it's no wonder that financial industry incumbents are engaging in projects promoting the generalized use of tokens. This is a summary of the Next Generation of Finance report on Institutional DeFi, sponsored by JPMorgan and DBS among others.

The golden era of intermediaries is coming to an end 

Trust and information are the building blocks of financial services. To guarantee trust, we have come to rely on financial intermediaries who preserve the accuracy of records related to ownership, liabilities and conditions across different, segregated ledgers that are disconnected from the communication channels they use. Such a siloed system requires a significant amount of coordination to harmonize the various ledgers and finalize transactions. This is way it is not uncommon for securities transactions to take days to settle.

Blockchain has the capacity to solve these inefficiencies by providing transactional and ownership details on one shared ledger. For this reason, interest in the use of tokens as digital versions of securities is increasing significantly. Financial institutions can achieve additional efficiency by eliminating intermediaries through the use of blockchain technology and smart contracts, enabling efficient trading and finalization of securities in the form of digital tokens. 

This leads to the Institutional DeFi, which refers to the use of DeFi protocols in association with tokenized securities, incorporating safeguards to ensure the financial integrity, regulatory compliance, and customer protection that underlay the traditional financial system. To be clear, this is not about crypto DeFi, but about the integration of DeFi innovations in the financial system. 

Blockchain concept artwork

Tokenization: the new cornerstone of securities

As financial institutions adopt blockchain technology, they are starting to use tokens to represent securities on the blockchain, to reduce settlement risk and shorten settlement times. 

The report describes how electronic book-entries substituted paper certificates and fostered electronic payments and the rise of trading. That, in turn, made securitization possible, which added value to previously illiquid assets such as mortgages. However, large amounts of securities valued at trillions of dollars are still recorded in multiple ledgers that are not connected to messaging infrastructure.

As a result, financial intermediaries record transactions on separate ledgers and then communicate with each other to reconcile their books and finalize settlements. Coordination across multiple ledgers and networks adds extra complexity to financial services, creating inefficiencies, raising costs and risks and prolonging settlement times.

Blockchain technology offers a solution by integrating ledgers and networks, enabling multiple parties to access the same information (such as transaction balances and ownership), disintermediating systems and reducing the need for reconciliation after transactions.


Entra en la nueva economía tokenizada

Enter the new tokenized economy

Token City is the ultimate bridge to the tokenized economy (tEconomy), in which tokenized companies (tEnterprises) create their cryptoasset markets (tMarkets), open to global investors (tCitizens).

Related news