What is this article about?
The transition from centralised finance (Ce-Fi) to decentralised finance (DeFi), highlighting the technological, regulatory, and cultural shifts influencing the payments industry
Why is it important?
It addresses the potential of DeFi to enhance financial inclusion and efficiency, while also discussing the challenges of integrating these systems within existing regulatory frameworks.
What’s next?
Increased engagement with regulators, widespread adoption of De-Fi practices, and continuous innovation to balance new technologies with compliance requirements.
The financial landscape is undergoing a seismic shift as decentralised finance (DeFi) gains traction, driven by both technological innovation and a growing desire for alternatives to traditional financial systems. Born out of the financial crisis and the subsequent mistrust in centralised institutions, DeFi aims to provide a peer-to-peer monetary system that could revolutionise how we conduct payments, manage assets, and access financial services. However, this transition is not without its complexities, as firms must navigate regulatory challenges, technological hurdles, and cultural shifts within their organisations.
The global financial crisis of 2008 fundamentally altered perceptions of centralised banking systems. Travers Smith Partner Natalie Lewis articulates, “Everyone decided that a centralised model reliant on the incumbent bank might not be the best way forward.” This sentiment laid the groundwork for the emergence of DeFi, which seeks to create a decentralised economy free from the shortcomings of traditional financial structures.
At its core, DeFi is characterised by its use of blockchain technology and smart contracts to facilitate financial transactions without needing intermediaries. The desire for a truly decentralised, peer-to-peer financial system reflects a broader shift in consumer sentiment—one that prioritises transparency, efficiency, and accessibility over the traditional banking model.
Lalit Kolhe, head of payments transformation at Tata Consultancy Services, highlights how decentralisation extends beyond consumer demand for transparency. He states, “Finance and payments too should benefit from cutting down the number of intermediaries, creating closer proximity to entities and processes actually involved in transactions.” Kolhe also points out the increasing competitiveness of decentralised systems, noting, “Decentralsed systems are becoming equally competitive in terms of compute power, decision-making logic, and intelligence.”
DeFi is experiencing significant growth in the financial services sector. The number of unique DeFi users worldwide reached a peak of 7.5 million in late 2021, with projections indicating continued expansion. By 2025, data from Statista indicates North America alone is expected to have 10.31 million DeFi users, while Asia anticipates 16.49 million users.
DeFi’s total value locked (TVL) stood at approximately $87.5 billion in August 2024, down from $175 billion in late 2021 due to cryptocurrency market volatility and increased competition from traditional financial instruments. The technology is particularly appealing for its potential to increase financial inclusion and empower unbanked populations like Sierra Leone. Major use cases include liquid staking and money lending, primarily supporting crypto investments.
Another benefit, according to Sudeepta Das. director, Cohesive Architecture, is reflected in FTX’s collapse, which he explains has exposed vulnerabilities in centralised models. “Importantly, innovations like Ethereum’s Layer 2 scaling solutions demonstrate how DeFi is addressing cost and scalability issues, signalling a broader market shift.”
Despite the promise of DeFi, its adoption faces significant regulatory scrutiny. The current regulatory landscape is predominantly shaped by frameworks designed for centralised finance, leading to tensions as firms explore the integration of decentralised technologies. Lewis highlights this challenge, noting, “The increased adoption of digital assets and new technologies to implement a decentralised economy has actually had some quite strong responses from regulators and policymakers.”
This regulatory pushback stems from concerns about consumer protection, financial stability, and the potential for illicit activities within the DeFi space. As firms strive to innovate, they must also comply with existing regulations that often do not account for the nuances of decentralised systems. Lewis stresses the importance of finding a balance, stating, “The goal must be to strike a balance between centralisation and decentralisation.”
Kolhe also emphasises interoperability, stating, “Interoperability between DeFi systems and CeFi instruments is crucial for scaling adoption while addressing regulatory and operational concerns.”
To effectively navigate the increasingly complex landscape of regulatory challenges in the finance sector, Lewis emphasises the importance of proactive engagement with regulatory bodies as a key strategy. “Speak to the regulator,” she advises, highlighting that open and ongoing communication is essential. Such dialogues can foster a mutual understanding between innovators and regulators, facilitating the development of regulations that strike a balance—accommodating both the rapid pace of innovation and necessary compliance measures.
Effective communication with regulators is particularly crucial in the context of decentralised finance (DeFi), which continues to evolve rapidly and presents unique challenges. As DeFi protocols and technologies become more prominent, regulators must adapt their frameworks to incorporate emerging technologies such as distributed ledger technology (DLT) effectively.
According to Das, firms must engage closely with regulators and adopt proactive measures like real-time monitoring tools. “While this sounds painful at present and appears to be a never-ending debate about regulation vs innovation, the collaboration will strengthen the image of DeFi and increase market adoption,” he tells Payments Intelligence.
Some progress in this area is already visible, notes Chris Harmse, co-founder and chief business officer at BVNK, with regulators beginning to integrate digital assets into their frameworks through new licensing and anti-money laundering (AML) regimes aimed at protecting customers and ensuring market stability. “Most recently in Europe, for example, MiCA is bringing assurances that stablecoin funds are safeguarded and that regulated crypto providers operating in the region are held to similar standards as Europe’s electronic money institutions and other financial institutions,” he explains.
While this might seem like a tall order, Harmse acknowledges that financial services businesses are no strangers to globally fragmented regulation. However, securing the right crypto licenses can take years. “Not every financial services business has the appetite to manage ongoing compliance for crypto globally. The consequence of failure is significant, since regulated businesses depend on their regulatory approvals to operate.”
Das argues that the purpose of cryptocurrencies must shift to encourage their everyday use. As he puts it, the focus should move from speculative motivations like “I will sell my pot when Bitcoin reaches 100,000” to practical applications, such as buying and selling goods. In his view, this shift is only achievable through collaboration with regulators.
Through proactive engagement, regulators can ensure they remain relevant in a swiftly changing global environment, fostering an ecosystem where innovation can thrive while maintaining the integrity and stability of the financial system. Collaboration between innovators and regulatory bodies is not merely beneficial but essential for shaping a future where progress and compliance coexist harmoniously.
While De-Fi discussions often focus on theoretical concepts, several tangible use cases illustrate its practical applications in the payments industry. Among the most prominent are stablecoins and the tokenisation of traditional financial instruments.
Stablecoins are digital assets pegged to a stable reserve, such as a fiat currency or commodity. They have emerged as a viable alternative for decentralised transactions. According to Harmse, stablecoins are emerging as a core payment rail. “They bring speed, transparency, and accessibility that traditional systems struggle to match, making it easy to transfer money globally, in an instant, at a fraction of the cost, and they operate across blockchains and are accessible 24/7/365.” Lewis emphasises that “stablecoins are going to go first” in terms of widespread adoption, particularly as firms explore their potential for everyday payments.
The rise of stablecoins reflects a broader acceptance of digital currencies within the financial ecosystem. However, the regulatory environment surrounding stablecoins remains fluid, with various jurisdictions grappling with how to classify and regulate these assets. Lewis points out the frustration many firms feel about the slow pace of regulatory progress in the UK, particularly regarding the development of stablecoin regulations.
As of June 2024, stablecoins accounted for 6.5% of the total cryptocurrency market capitalisation, with a total market cap of $162.36 billion. This marks a substantial increase from earlier years, though still below the market share of major cryptocurrencies like Bitcoin and Ethereum. Tether (USDT) remains the dominant stablecoin, with a market cap of $125 billion as of November 13, 2024.
USD Coin (USDC) is the second-largest, with a market cap of $35.58 billion as of November 14 2024. The stablecoin market has diversified beyond USD-pegged tokens. As of June 2022, there was growing adoption of euro-pegged stablecoins like EURT and EURS, as well as stablecoins pegged to other fiat currencies. Notably, the collapse of TerraUSD (now TerraClassicUSD) in May 2022 significantly impacted the algorithmic stablecoin sector, with its market cap plummeting from $18.48 billion in April 2022 to $0.22 billion in May 2022. Despite challenges, the DeFi sector, which heavily utilises stablecoins, has shown resilience. As of April 2024, there were over 5.2 million unique DeFi users, indicating continued interest in stablecoin-based financial applications.
Tokenisation, the process of converting ownership of real-world assets into digital tokens on a blockchain, is another promising use case for De-Fi. Lewis notes, “Whenever you have tokenisation of fund units or any other financial instrument, you should also have a digital form of money that would enable atomic settlement on those platforms.” This capability can significantly streamline transactions, reducing costs and increasing efficiency.
As tokenisation gains traction, firms must address the associated regulatory challenges and ensure they have the necessary infrastructure to support these innovations. Kolhe underscores the transformative potential of tokenisation but stresses the need for regulatory adaptation. He states, “Anything that can be digitised can be tokenised, and anything that can be tokenised can be exchanged. To enable this, regulations must ease, allowing smaller closed-loop ecosystems to thrive.” The potential for tokenisation to transform asset management and trading is vast, but it requires a robust understanding of both the technology and the regulatory landscape.
Tokenisation growth is gaining momentum across various industries, with real estate expected to become the largest tokenised asset by 2030, accounting for nearly one-third of the overall market.
The global real-world asset tokenisation market is projected to expand significantly, with real estate tokenisation reaching $3 billion by 2030. In the financial services sector, asset tokenisation is a key application of blockchain technology, alongside digital currencies and secure information exchange. The cryptocurrency market continued its rise in Q2 2024, fuelled by the approval of Bitcoin and Ethereum ETFs on major U.S. stock exchanges. This regulatory shift has led to significant investment inflows, with BlackRock’s iShares Bitcoin Trust ETF reaching up to $17 billion since launch. Despite the growth, challenges remain, including regulatory scrutiny and concerns about fraud in blockchain applications.
The transition from Ce-Fi to De-Fi represents not only a technological shift but also demands significant cultural changes within financial institutions. According to Das, “A successful transition to De-Fi demands cultural change, including embracing agility, innovation, and openness to collaboration. Financial institutions must shift from hierarchical decision-making to cross-functional teams. Firms can foster this culture by investing in training, encouraging experimentation, and promoting blockchain literacy at all levels.” This underscores the need for organisations to rethink traditional structures and processes to adapt to the fast-evolving De-Fi landscape.
As Lewis highlights, these institutions must also align their internal strategies with the rapidly changing market. She notes, “It’s going to cost a lot to upgrade systems to interact and submit transactions to a decentralised platform,” emphasising the substantial financial investment required for infrastructural overhauls. This cost barrier is particularly challenging for smaller firms, which often lack the resources necessary to invest in new technologies essential for the De-Fi transition.
In light of these hurdles, establishing a compelling business case for adopting De-Fi solutions becomes paramount. As Lewis further observes, “No board is going to sign off that spend and that uplift unless there’s a real use case.” This highlights the importance of demonstrating clear, tangible benefits that justify the expenditure and effort required for such a transformation.
Ultimately, the shift to De-Fi demands both financial investment and a cultural transformation in how organisations approach technology and collaboration. Without these critical changes, coupled with a strong business case, institutions risk falling behind competitors who successfully embrace the future of decentralised finance.
To foster a robust and enduring culture of innovation, firms must actively engage and collaborate with technology providers, regulatory bodies, and industry stakeholders. This collaboration is particularly crucial as the finance DeFi space matures and evolves
For Harmse, forging partnerships between traditional financial institutions, which have established reputations and customer bases, and technological innovators at the cutting edge of digital transformation can pave the way for successfully integrating DeFi solutions into the mainstream financial ecosystem.
“Interacting with blockchains is very different to working with banks &/or fiat systems. It can be technically challenging for someone who has honed their skills in traditional finance, involving numerous networks and tokens that are constantly evolving.” He stresses that businesses are keen to use stablecoin payment rails without concern about blockchain choice, managing gas fees, wallet configuration, and funding.
Furthermore, in discussions surrounding innovation and adaptation to new technologies, Lewis advocates for a nuanced and thoughtful approach to governance within decentralised systems. She emphasises, “One of the big challenges with DLT is that you are placing your trust in many nodes that are dispersed across various locations to perform their designated functions effectively.” This highlights the inherent complexities and vulnerabilities within these systems.
As firms begin to explore and implement DeFi solutions, understanding the implications of governance structures and the dynamics of trust will be critical to their long-term success and sustainability in this rapidly evolving sector. By addressing these challenges proactively, organisations can navigate the complexities of the De-Fi landscape more effectively, ensuring that they leverage the opportunities while minimising potential risks.
As we look to the future, it is clear that DeFi will play an increasingly prominent role in the payments industry, blending with traditional financial systems. According to Das, “the next five to ten years are likely to see a convergence of DeFi and traditional finance. The Bank of International Settlements’ (BIS) recent exploration into DeFi lending models suggests that centralised institutions are recognising the benefits of decentralisation. Tokenisation of real-world assets, such as property and commodities, is expected to be a major growth area, bridging the gap between these financial systems.” This convergence signals a transformative era where DeFi and traditional finance collaborate to unlock new possibilities.
Lewis predicts that “if people start using stablecoins as a means of payment, I think that will then see a bit of a boom accelerate.” This anticipated growth could act as a catalyst for the adoption of central bank digital currencies (CBDCs) and other digital asset solutions. Harmse further envisions a future where G20 currencies integrate with blockchain technology, explaining, “It’s not difficult to imagine a world in five years’ time where real-time local payment rails integrate seamlessly with blockchains, and stablecoins and all leading fiat currencies are seamlessly interchangeable in real-time. When we get there, it will be one of the most incredible value unlocks for the payments ecosystem.”
For jurisdictions like the UK to remain competitive in this evolving landscape, regulatory clarity and innovation-friendly policies are urgently needed. The ongoing discussions among industry stakeholders and regulators will play a crucial role in shaping the trajectory of De-Fi. Firms must be prepared to adapt to these changes, leveraging emerging opportunities to remain at the forefront of this transformative shift.
The transition from centralised finance (Ce-Fi) to decentralised finance (DeFi) in payments signifies both opportunities and challenges for the financial industry. This shift heralds a new era of transparency, efficiency, and accessibility, but also brings with it the need to navigate complex regulatory frameworks and integrate cutting-edge technologies. As firms adapt to this changing landscape, proactive engagement with stakeholders, including regulators, customers, and technology providers, becomes crucial.
For Harmse, banking and licensing are key challenges for financial institutions engaging with crypto, but regulation is improving. “It’s essential to have a clear approach and the right support. Start small—many begin by converting stablecoins to fiat before holding them as assets. Over time, this can unlock opportunities like efficient treasury management and product innovation,” he explains.
Understanding and adapting to technological advancements such as blockchain and smart contracts is imperative. These technologies underpin the DeFi movement and require significant investment in systems and training. Moreover, as these changes unfold, organisations must also undergo cultural shifts to embrace a more agile and innovative approach, aligning their internal strategies with the fast-evolving market.
To ensure successful integration into the DeFi space, firms must foster an environment of continuous learning and flexibility, allowing them to respond swiftly to regulatory changes and technological advancements. Engaging openly with regulatory bodies will help shape policies that support innovation while ensuring compliance, thereby securing a stable transition from Ce-Fi to DeFi.
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