The integration of cryptocurrencies and traditional finance has seen some hard-fought victories. A prime example is the recent 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, despite these advancements, digital assets have yet to make significant progress in the banking sector and with the majority of financial institutions.
It is worth noting the SEC’s initial reluctance to approve the ETFs. The SEC had previously rejected multiple spot Bitcoin ETFs from various challengers, with the first refusal dating back to July 2013. Eventually, after the involvement of large fund managers from the traditional finance world, such as BlackRock, and the conclusion of legal action surrounding Bitcoin ETFs, the SEC granted approval.
In a statement on January 10, SEC Chair Gary Gensler emphasized that the approval did not signify an endorsement of Bitcoin itself. Nevertheless, this begrudging approval marked the end of a ten-year period of denials.
Despite these achievements, the crypto industry still faces numerous challenges in gaining acceptance in the predominantly traditional finance world. The union between old money and crypto remains a difficult one. Bob Ras, co-founder of Coreum, a blockchain protocol for tokenized securities and real estate, highlighted the skepticism of regulators towards crypto projects, even those aiming to adopt traditional industry standards.
Ras’s own experience during the development and launch of Sologenic, a platform for trading tokenized stocks, demonstrated the obstacles faced when trying to obtain a security broker-dealer license within Europe. Due to the intransigence of European regulators, Sologenic decided to focus on offering tokenization solutions for institutions, bypassing the need for a license.
Apart from regulatory burdens, another factor contributing to the separation between traditional finance and decentralized finance (DeFi) is the difference in philosophies regarding how finance should operate. Sologenic initially operated on the XRP Ledger blockchain but eventually developed Coreum, a layer-1 blockchain with smart contract functionality designed to meet institutional demands.
During the development phase of Coreum, the team had to address why the merger between TradFi and blockchain had not been successful. They discovered that no existing blockchain fully catered to enterprises or complied with banking standards and regulations like ISO 20022, AML, and KYC. Moreover, the lack of checks and balances in DeFi made financial institutions wary of adopting blockchain technology.
To bridge this gap, Coreum decided to provide administrative-level powers for regulated financial entities, giving them the necessary control to ensure compliance with regulations.
While the approval of a spot Bitcoin ETF may indicate growing acceptance of crypto in the stock market, the financial sector remains a challenging hurdle. Many individuals in the sector still harbor skepticism towards crypto. For instance, the European Central Bank recently published a report expressing doubts about the possibility of a spot Bitcoin ETF in Europe.
Changing the hearts and minds of the traditional finance sector poses a significant challenge. Despite the increasing connection between TradFi and crypto, much work still needs to be done to achieve widespread acceptance and integration.