Cryptocurrency and traditional finance (TradFi) were once seen as rivals, but their collaboration is now undeniable. Institutional investors, once skeptical, are increasingly integrating crypto into their portfolios. BlackRock and Fidelity are spearheading blockchain adoption, while Bitcoin ETFs and tokenized assets gain mainstream traction. As regulatory uncertainty remains, financial giants recognize blockchain’s potential to enhance efficiency, liquidity, and transparency. This article from SwapSpace CEO Andrew Wind will delve into the role of crypto in traditional finance, exploring key trends, challenges, and the future of this transformative relationship.

Institutional adoption of crypto has surged, transforming the industry from a speculative retail market to a major financial asset class. A pivotal moment came in January 2024, when the SEC approved spot Bitcoin ETFs, attracting over $4.5 billion in inflows within a month. BlackRock's iShares Bitcoin Trust (IBIT) surged to $36 billion AUM within just three months of its January 2024 launch, reflecting strong institutional demand.

Beyond ETFs, financial institutions are integrating blockchain in innovative ways. JPMorgan’s Onyx platform has processed over $300 billion in blockchain-based repo transactions, reducing settlement times from days to minutes. Goldman Sachs and Citigroup are exploring tokenized bonds and equities, leveraging blockchain for improved liquidity.

Interesting fact! Even central banks are getting involved, too. The Bank for International Settlements (BIS) revealed that 94% of central banks are exploring Central Bank Digital Currencies (CBDCs), signaling the growing institutionalization of digital assets.

Tokenization is the conversion of real-world assets like stocks, bonds, and real estate into digital tokens, enhancing liquidity and reducing settlement times. This process enhances liquidity, reduces settlement times, and makes previously inaccessible markets more inclusive. According to Boston Consulting Group, the market for tokenized assets will reach $16 trillion by 2030.

• Real estate tokenization. Tokenization lowers entry barriers in real estate by enabling fractional property ownership.  In 2023 Hong Kong-based Aspen Digital launched a platform to tokenize luxury real estate, giving global investors access to prime properties. By then, the firm held 19% of the St. Regis Aspen Resort, advancing blockchain-powered fractional ownership.

• Bond and debt markets. The European Investment Bank (EIB) issued a €100 million digital bond on Ethereum, demonstrating the efficiency and transparency of blockchain-based bond issuance. Moreover, UBS launched a $50 million tokenized bond in 2022, settling it on the SIX Digital Exchange in Switzerland.

• Alternative assets and commodities. Santander issued a $20 million tokenized green bond, showcasing how tokenization can support sustainability efforts. Also, ABN AMRO tokenized a shipment of cocoa beans

Traditional financial institutions are actively entering the tokenization space. HSBC and Wells Fargo have started using blockchain for cross-border settlements, while JPMorgan’s Onyx platform has processed over $300 billion in blockchain-based transactions.

Interesting fact! According to a 2023 EY survey, 80% of high-net-worth investors and 77% of institutional investors prefer accessing tokenized assets through established financial firms rather than crypto-native platforms.

Stablecoins and Central Bank Digital Currencies (CBDCs) are crucial in linking the crypto ecosystem with traditional finance. By combining blockchain technology with the stability of fiat currencies, they offer faster transactions, lower costs, and greater financial inclusion.

Stablecoins are digital assets backed by stable reserves such as fiat currencies or commodities, offering a hedge against the volatility typical of traditional cryptocurrencies. Among them, gold-backed stablecoins, like PAX Gold (PAXG) and Tether Gold (XAUT), offer investors a digital representation of physical gold, combining blockchain efficiency with the security of traditional assets.

The stablecoin market continues to expand, with its total market capitalization surpassing $200 billion in Q1 2025, marking a 15% increase from the previous quarter. This growth highlights the rising demand for stability in the crypto ecosystem.

Important! Among the largest fiat-backed stablecoins, Tether (USDT) leads with a market capitalization of approximately $143.3 billion, followed by USD Coin (USDC) at about $58.3 billion, and Sky Dollar (USDS) at $8.23 billion. 

Traditional financial institutions are also integrating stablecoins into their operations. In February 2019 JPMorgan introduced JPM Coin, a digital currency for instant cross-border payments, improving efficiency and reducing transaction costs. Meanwhile, in Venezuela, stablecoins have become an economic lifeline; USDT transactions surged by 110% in Q2 2024, reaching $20 billion, as citizens sought protection from hyperinflation.

CBDCs are digital versions of a country’s fiat currency, issued and regulated by central banks. As of 2023, 134 countries are exploring CBDC projects, with some already launching digital currencies.

The Eastern Caribbean Currency Union has successfully introduced a digital EC dollar, while the Bahamas was the first country to launch a CBDC, known as the Sand Dollar. Several other nations are actively developing their digital currencies. Sweden’s Riksbank is testing the e-krona, a blockchain-based digital currency intended to complement cash and modernize payments. Similarly, Ukraine’s National Bank has been working on the e-hryvnia since 2016, aiming to enhance its financial infrastructure. Learn more about CBDC in our recent article.

DeFi is revolutionizing the financial landscape by offering decentralized alternatives to traditional financial services, utilizing blockchain technology and smart contracts to eliminate intermediaries. This transformation impacts various aspects of traditional finance, leading to increased efficiency, accessibility, and innovation.

Disintermediation and cost reduction

DeFi platforms enable peer-to-peer transactions without the need for traditional intermediaries like banks, reducing transaction costs and processing times. For instance, Algorand boasts transaction fees as low as $0.001, while BNB Chain maintains fees around $0.10 per transaction. In contrast, TradFi systems impose significantly higher costs (wire transfers can range from $10 to $50), ATM withdrawal fees often exceed $3 per transaction, and credit card interchange fees typically range between 1.5% and 3%.

DeFi lending platforms such as Aave and Compound offer borrowing rates around 8-10%, while traditional banks provide savings interest rates as low as 0.06%. This disintermediation challenges the traditional banking model by offering more efficient financial services.

Enhanced transparency

DeFi transactions are recorded on public blockchains, ensuring transparency and minimizing fraud. Unlike traditional finance, where transactions remain within centralized institutions, DeFi enables real-time auditing, fostering greater trust. For instance, the pseudonymous investigator ZachXBT has independently traced billions of dollars in stolen cryptocurrency, leading to the recovery of over $210 million in criminal proceeds.

Financial inclusion

DeFi extends financial services to unbanked and underbanked populations by providing access to financial products without traditional banking infrastructure. For example, in Latin America, where approximately 65% of the population is unbanked or underbanked, DeFi platforms provide access to financial services such as loans and global payments.

Integrating cryptocurrencies into traditional financial systems presents significant regulatory challenges that impact both innovation and financial stability.

• Fragmented regulatory landscape. Globally, crypto regulation varies widely. Among 60 countries studied, 33 have fully legalized cryptocurrencies, 17 have partially banned them, and 10 have imposed general bans. Notably, 12 G20 countries, representing over 57% of global GDP, have fully legalized cryptocurrencies, highlighting the lack of uniformity in regulatory approaches.

• Compliance and financial crime risks. Traditional financial institutions face challenges in adopting cryptocurrencies due to stringent regulatory requirements, including anti-money laundering (AML) and know-your-customer (KYC) protocols. The decentralized and pseudonymous nature of crypto complicates compliance efforts, increasing the risk of fraud and financial crimes.

• Evolving regulatory frameworks. In the United States, the Senate Banking Committee's recent approval of digital assets legislation aims to establish a regulatory framework for stablecoins, reflecting a growing effort to integrate cryptocurrencies into the financial system.

The future of crypto in traditional finance is poised for continued evolution. Major financial institutions are deepening their involvement in crypto-related services, with Visa and Mastercard launching crypto payment cards and facilitating crypto transactions for clients globally. In 2024, Goldman Sachs announced plans to offer crypto custodial services for institutional clients, marking a significant shift towards mainstream adoption. Additionally, blockchain-based trade finance solutions, such as those by We.trade, are streamlining international trade and reducing costs, with the global blockchain trade finance market expected to grow at a 23% CAGR by 2027.

As crypto's role in traditional finance solidifies, the integration of decentralized finance and tokenized assets could fundamentally reshape financial markets, offering new ways for investors to engage with global capital markets.

Crypto’s integration into TradFi is revolutionizing global markets. While challenges remain, the ongoing adoption by financial institutions, regulatory developments, and innovations like tokenization and DeFi indicate a promising future for crypto in the mainstream ecosystem. The shift towards digital assets is inevitable, and the financial world will continue to adapt to these transformative changes.