Corporate Finance, DeFi, Blockchain, Web3 News
Corporate Finance, DeFi, Blockchain News

Institutionalisation of crypto-assets and DeFi–TradFi interconnectedness

This report examines institutional investor participation in markets for digital assets, including crypto-assets and decentralised finance (DeFi).

It considers and tests potential drivers of growing supply and demand for such assets by institutional investors, analyses the potential for increasing interconnectedness between traditional finance (TradFi) and decentralised finance and identifies linkages between the two.

The report then outlines the risks these growing markets may create, while also examining the potential benefits of the decentralisation of financial services, before putting forward policy recommendations.

Over the past few years, digital assets (including crypto-assets, stablecoins and decentralised finance or DeFi) have increased exponentially. Increased interest and investment in digital assets by traditional financial sector players and institutional investors, coupled with increased supply of products and services providing access to crypto-asset risk, are transforming business models and risk profiles of traditional finance (TradFi). Increased participation of institutional investors in digital asset markets can give rise to investor risks at the micro-level, while it may also create channels of potential contagion between decentralised finance and traditional finance. Given the multitude of potential risks involved in these growing markets for crypto-assets and DeFi, there is a role for policy makers to evaluate such risks and consider policy action to address them. At the same time, growing institutionalisation of digital assets could bring a number of potential benefits to financial markets and their participants which should not be underestimated or overlooked.

Digital assets are one of the most significant developments impacting the financial services industry over the past few years, and will have a prominent role in the digital transformation of the industry in the years to come. There is currently no commonly-agreed definition of digital assets, and the term is used by the financial industry to encompass crypto-assets, tokenised securities or other tokenised assets, stablecoin arrangements, central bank digital currencies (CBDCs), and other blockchain-based instruments (e.g. non-fungible tokens - NFTs). In the US, the term digital asset has been defined in public statements as an asset that is issued and/or transferred using distributed ledger or blockchain technology, including, but not limited to, so-called “virtual currencies,” “coins,” and “tokens.” A particular digital asset may or may not meet the definition of “security” under the federal securities laws (SEC, 2021[1]).

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Vendredi 20 Mai 2022