Why TradFi and DeFi still don’t speak the same language

Old money meets new code. Why TradFi and DeFi still talk past each other.

Despite their shared focus on finance, traditional finance (TradFi) and decentralized finance (DeFi) often seem to be speaking entirely different languages. The former is founded on decades of regulatory frameworks, risk models and centralized control. The latter is based on open-source code, permissionless systems and radical transparency.

The disconnect goes far beyond jargon. It reflects deep-rooted differences in values, assumptions and approaches to trust. As innovators, regulators and investors attempt to bridge the divide, understanding why these two worlds often talk past each other and learning how they can talk to each other better is more critical than ever.

Crypto talks code…

The hardest languages to learn are not necessarily those that do what yours does in a new way. They are the ones that make you constantly question distinctions in your world. Crypto is a conceptual shift and one of the hardest languages for bankers to learn.

Because crypto is a trust-less model, banks are not required to create money or serve as trusted intermediaries in financial transactions. There are no government controls, centralized oversight or transaction fees either.

Crypto relies on a decentralized, peer-to-peer network, where the participants make up the network and crypto belongs to everyone. Transactions are recorded on a Blockchain, a public ledger, where everyone is involved but no-one is in charge.

These new ideas about money – who creates it, who owns it and who’s in charge – are very different to old ideas about money. It’s also difficult to apply old-style regulatory levers to something that’s decentralized and inherently works quite differently.

…Banks talk compliance

Banks and crypto firms don’t speak the same language on regulation. Or least they haven’t been. Banks are highly regulated in most markets; crypto firms are not. This has led to different understandings of key issues, such as governance, supervision and consumer protection.

For example, banks must undergo stress tests, adhere to requirements around capital adequacy, fraud protections, the marketing of regulated products and more. Whereas the rules for crypto firms are less clear-cut and still evolving.

It’s been hard for crypto exchanges to work with banks, although this is changing. This is partly as they still don’t speak the same language. But it’s partly due to practical problems, around bridging the TradFi and DeFi worlds.

Practical problems, double conversion

Until crypto goes mainstream, there’ll always be a double conversion. Fiat is converted into crypto. It’s spent, saved or invested, before being converted back into fiat again. Taking crypto out of an exchange and sending it to a high street bank is likely to fail. Or involve a head-scratchingly convoluted process with multiple hops and hoops to jump through.

UK banks, such as Barclays, Lloyds, TSB and Santander, block crypto purchases and have for years. This included to Binance, the world’s largest cryptocurrency exchange. So much so, Binance stopped accepting new customers in the UK in October 2023.

This was after UK regulators clamped down on digital asset companies advertising to UK consumers, unless they were authorized to do so. But also, because it was so difficult to pay out – and if exchanges can’t pay out, customers are reluctant to pay in.

It’s also becoming harder to buy crypto with a credit card. The UK’s financial regulator is seeking to introduce a blanket ban on all cryptocurrency purchases involving credit. So, what are the alternatives?

Finally, a banking network that speaks your language

Crypto exchanges, iGaming operators and businesses that accept crypto pay-ins are looking for a way to pay out, without necessarily going through traditional banking institutions. Ultimately, they want funds to end up in a bank account, though. They need a translator to bridge the TradFi and DeFi worlds.

PSPs may be the answer. They are the conduits contributing to the smooth flow of funds between traditional and newer institutions. For example, when clients send a transaction to Inpay, it’s not going directly to a bank, rather to a PSP with an electronic money institution license.

Inpay can pay out to a local bank account without transactions being blocked. We help open new markets, insulate our clients against changing crypto regulations and improve the end-customer experience.