DeFi and banks: Towards a symbiotic relationship? Evidence of crypto and DLT-related activities of G-SIBs

Abstract

This paper investigates a possible future symbiotic relationship of decentralised finance (DeFi) with the traditional banking sector, with the banking system integrating compliant versions of DeFi in parts of its operations. In particular, the paper indicates empirical trends showing the increasing investment of major global banks in the wider DeFi space through the investment in distributed ledger technologies and the acquisition of cryptorelated entities. The development of compliant tokenisation will be a catalyst for the potential integration of compliant versions of DeFi with banks, and DeFi pools could constitute the currently lacking secondary market for regulated tokenised assets. Repos of tokenised assets in compliant versions of DeFi could also reduce the risk of DeFi as compared with the current use of non-compliant or unregulated crypto-assets as collateral. The integration of compliant DeFi applications by banks as part of their operations would — paradoxically — require a certain level of re-centralisation of DeFi in order to make it compliant and address the long list of important risks observed in current forms of DeFi activity.