Bridging the Divide: Integrating Cryptocurrency Enterprises with Conventional Finance

Key Points

The integration of cryptocurrencies into traditional finance has seen some significant strides, one of the most notable being the approval of the first spot Bitcoin (BTC) exchange-traded funds (ETFs) in the United States on January 10.

The U.S. Securities and Exchange Commission’s (SEC) approval of the ETFs could potentially lead to increased capital inflows and more institutional engagement in the cryptocurrency market.

However, digital assets have yet to penetrate the banking sector and the vast majority of financial institutions.

The Journey to Approval

It’s important to remember the hesitation with which the SEC approved the ETFs.

The SEC had previously rejected multiple spot Bitcoin ETFs from various applicants, with the first denial dating all the way back to July 2013.

Approval finally came after large fund managers from the traditional finance world, such as BlackRock, got involved and legal issues surrounding Bitcoin ETFs were resolved.

On January 10, SEC Chair Gary Gensler stated, “While we approved the listing and trading of certain spot Bitcoin ETP shares today, we did not approve or endorse Bitcoin.”

Despite the grudging nature of the approval, it marked the end of a decade of denials.

However, the industry still faces numerous obstacles in gaining acceptance in a predominantly traditional finance world.

Bob Ras, co-founder of Coreum — a blockchain protocol developing smart tokens for tokenized securities and real estate — has noted that regulators have long been skeptical of crypto projects, even those that aim to adopt traditional industry standards.

Ras experienced this skepticism firsthand during the development and launch of Sologenic, a platform he co-founded for trading tokenized stocks.

“We saw the gap between the traditional financial market and blockchain assets,” Ras said, “So we started a project called Sologenic. Sologenic bridges the traditional financial market with crypto assets. During those days, the idea was to obtain a MiFID [Markets in Financial Instruments Directive] license — a security broker-dealer license inside Europe.”

Unfortunately, the journey to a broker-dealer license was fraught with difficulties. “Unfortunately, they wasted two years of our time,” said Ras.

Due to the inflexibility of European regulators, Sologenic decided to instead provide tokenization solutions for institutions only, bypassing the need for a MiFID license.

While regulatory hurdles play a part in the divide between traditional finance and decentralized finance (DeFi), differing philosophies on how finance should operate also contribute to this divide.

Sologenic initially ran on the XRP Ledger blockchain, but the specific needs of the platform led the Sologenic team to build Coreum, a layer-1 blockchain with smart contract functionality designed to meet institutional demands.

During the development phase of Coreum, the Sologenic team had to consider why traditional finance and blockchain remained distant despite numerous attempts to merge the two.

The answer was not straightforward.

“Right now, if you look at all the blockchains in the world, there’s no blockchain that is focused 100% on enterprises,” said Ras. “No blockchain that is in 100% in compliance with the [banking standard] ISO 20022, that has AML [Anti-Money Laundering and KYC [Know Your Customer] on-chain.”

A more fundamental issue was also at play: DeFi makes traditional financial institutions nervous.

Ras told Cointelegraph that a lack of checks and balances makes traditional institutions hesitant. Without it, they can’t guarantee they won’t violate regulations, so “you need to give them some level of control in order to get them to adopt the technology.”

Ultimately, Coreum decided the best way forward was to provide administrative-level powers for regulated financial entities.

The approval of a spot Bitcoin ETF may indicate that the stock market is warming up to crypto, but the financial sector may be a tougher nut to crack.

There is still strong skepticism towards crypto from many in the sector.

On February 22, the European Central Bank published a report on the possibility of a spot Bitcoin ETF in Europe.

The report’s title, “ETF approval for bitcoin – the naked emperor’s new clothes,” is indicative of the authors’ critical view of crypto.

Changing the attitudes and perceptions of the traditional finance sector is a significant challenge.

So, while traditional finance and crypto are becoming more closely linked than ever, there is still much work to be done.