UniFi, the key to unlock blockchain for banking

Banks and established financial institutions are crypto-curious and know they need to innovate but have not taken the plunge into blockchain yet. While the legacy financial world knows that the future of finance will happen on blockchain rails, they are still grappling with how to reconcile this wild west of DeFi with the regulated world they operate in. Banks that do want to tokenise assets, but most do not want to use a public blockchain because it is too risky, lacks security and privacy, and most of all, makes compliance with strict industry regulations difficult.

Within hours of being launched, Blackrock’s Ethereum address suffered dust attacks with parts of the funds coming from a tornado cash mixer, a protocol that was previously sanctioned by OFAC. This is just one example of the kinds of risks that regulated institutions face when using public blockchains.

It is because of risks like these that some financial institutions, especially the ones lacking in-house DeFi know-how are nervous with the sea of change coming. As the old adage goes “if it isn’t broke, don't fix it.” Traditional banking and financial institutions are perfectly content with the status quo.

‍TradFi’s resistance to blockchain

We are speaking with major financial institutions on a daily basis. For the most part, they are curious about DeFi and Blockchain, and they know that they risk being disrupted if they don’t adopt this new technology. However, very few of them want to be the first to take the plunge. There’s no incentive to be the first one to figure out how to get things to work from a technology and regulatory point of view. Moreover there are several perceived risks from a traditional financial institution point of view, in terms of privacy, scalability, regulatory, technology and so on.

All of these factors create a situation where many of the biggest financial institutions built quite competent in-house Digital Asset teams, but at the same time these teams are somewhat restrained due the above mentioned concerns, most projects never get past the financial institution’s compliance department or IT security department. As a direct consequence of this, financial institutions have been in an endless exercise of creating Proof-of-Concepts, Pilots and Sandboxes to test ideas in a safe environment without fully committing.

While this has been happening, the technology, tooling, methods and even regulation has been advancing. Technology in particular, will continue to advance, use cases will continue to be created and institutions that don’t adopt it risk being left behind, becoming obsolete and losing market share. By the time they realise it may be too late.

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What we have learned: blockchain benefits to banks

The Blockchain Technology and in particular DeFi and community-driven innovation can bring several benefits to financial institutions. These include:

·      Efficiency of transactions (eliminating middlemen and inefficiencies)

·      Transparency of transactions (for example cross-border)

·      Being on the financial rail of the future, with several other institutions

·      Access to the innovations from DeFi

·      Shared liquidity with other institutions and public chains

·      Unlocking new use cases and revenue opportunities

The challenge is how to have a system that financial institutions are comfortable to adopt. Those traditional financial (TradFi)institutions who are more open-minded can tap into the power of decentralised finance (DeFi) using blockchain. Some are happy to take the plunge and go heads first into public chains while others, require a new approach.

In the US, financial institutions like JP Morgan, Franklin Templeton, and Fidelity are trying out different blockchain technologies. For example Hyperledger Besu is widely used in pilots and proof-of-concepts. In other parts of the world, the financial system is embracing blockchain. Brazil is in the final stages of setting up their ambitious CBDC system based on EVM technology.

The UK recently announced the intent to have clear regulation for Stablecoins and Staking. China and other regional players are leading project mBridge, creating an international CBDC system. However many of these projects create isolated islands, where the users of these systems cannot access the benefits of DeFi and the liquidity and innovation of public blockchains. This is where UniFi comes in.

The bottom line is that digital assets, or tokenisation of financial instruments on blockchain, enables huge advantages of efficiency and operations, saving time and money, but more importantly, they unlock completely new use cases and new sources of revenues for financial institutions. Some examples include:

-> CBDC (Wholesale & Retail)

-> Tokenisation of real world assets (RWA)

-> Tokenisation of financial instruments

-> FMI Settlements

-> Intra-institution transactions

-> Cross-border FX

-> Increased liquidity in secondary markets

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Why do we need UniFi?

Any solution that proposes to bridge the gap between DeFi and TradFi, would need to provide all the benefits of DeFi, but in a way that makes TradFi comfortable to use. To this end, the system needs to be compatible with the EVM standard, interoperable with other systems and with public permissionless blockchains, and crucially do these things while allowing institutions to comply with regulations and provide the level of security that they require.

UniFi introduces a groundbreaking concept, recognising the convergence of DeFi and TradFi interests, aimed at creating a secure, efficient, and innovative financial landscape for the future. A hybrid approach that combines the best of public permissionless blockchains with the privacy and security of private permissioned blockchains.

Traditional banks risk becoming obsolete/extinct if they don't embrace blockchain technology now. The status quo will soon be the past, and thanks to a new unified finance approach that combines the best of both worlds – TradFi + DeFi = UniFi – the global financial system can start to realise the potential of blockchain.

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