Wall Street's Slow Move to DeFi: Security and Rules Hold the Key

Wall Street hasn't yet fully embraced decentralized finance (DeFi), a field open to all that offers high returns and constant access. However big financial firms are cautious because of major obstacles. Security and compliance issues are the main barriers preventing traditional finance (TradFi) from moving into DeFi. Despite growing interest in blockchain from big names such as BlackRock and JPMorgan, the risks from vulnerabilities in smart contracts and regulatory compliance are significant.

DeFi's security concerns are highlighted by the $1.7 billion lost to theft last year, largely due to smart contract flaws. This highlights the need for better security measures, such as insurance and private transactions, which TradFi requires but DeFi struggles to provide. Another major hurdle is compliance. Integrating Know Your Customer (KYC) measures is doable, but trading on public networks introduces complexities such as the risk of accidental association with illicit funds. KYC enforcement at the protocol level is required to make all transactions traceable.

In addition, compliance needs to extend to the assets traded, possibly requiring restrictions to ensure that only authorized parties can trade certain assets. This could allow both regular users and accredited investors to use the same blockchain but for different reasons. The move to integrate DeFi with traditional finance will be slow and will require collaboration between Web3 developers and traditional financial institutions. Progress at the protocol level is key to creating a compliant and secure environment attractive to institutional players. Ramon Recuero highlights the potential for growth in DeFi if these issues are addressed. Like great historical achievements, merging traditional finance with DeFi will take time and innovation.