DCW Research
Why the language of “convergence” is misleading the market, and what institutions need to build instead
EXECUTIVE SUMMARY
A comforting story has become almost canonical in crypto circles: that decentralised finance and traditional finance are converging, and that the result will be an elegant hybrid combining the best of both worlds. It is a tidy narrative. It is also mostly wrong.
The more accurate reading: where an institution can use a blockchain to improve an existing business line, it will, not out of conviction in decentralisation, but because the technology tells a compelling cost story. Institutions are not merging with DeFi. They are reconfiguring it, keeping the components that fit their operating and risk constraints and discarding the rest.
What emerges is a third category: programmable financial infrastructure, built on blockchain rails and engineered from the outset for institutional requirements. This briefing sets out how that reconfiguration is happening, what it demands of institutional leadership, and how programmable financial infrastructure is actually being built.
The narrative institutions should discard
Legislative developments such as the CLARITY Act in the United States may, over time, make it easier for regulated entities to interact directly with permissionless systems. That is a meaningful shift, and worth watching closely. But regulatory change does not reset an institution's risk posture overnight. Boards and risk committees will continue to evaluate new technology through the same four lenses they always have: cost, risk, control, and operational fit.
That reality creates two distinct opportunities, not one.
The first is helping institutions adopt the infrastructure they are ready for today. Every primitive an institution takes on, whether atomic settlement, programmable money, or tokenised collateral, validates the underlying technology, extends the shared rails, and pulls genuine volume and capital onto public or permissioned chains.
The second is to keep building the open, crypto native financial system that most institutions are not yet ready to touch.
These are not competing bets, and leadership teams should stop treating them as such. They can, and arguably should, run in parallel. Open networks continue to produce the primitives, market structures, and innovations that institutions eventually adopt once those primitives have matured. If both tracks succeed, convergence happens naturally over time, not because one system swallows the other, but because both increasingly depend on the same underlying rails.
What TradFi is actually doing
Institutions adopt a blockchain primitive when it satisfies two conditions simultaneously: it improves cost, risk, or distribution economics, and it remains compatible with the institution's need for control and accountability. The primitives that get discarded along the way, open access, pseudonymity, and immutable execution, tend to pass the first test comfortably and fail the second decisively. That is why institutional adoption looks selective rather than arbitrary, and it is a useful design test for any team building in this space: if a feature only creates value by removing institutional control, expect it to be reshaped or rejected, however elegant the engineering.
It is worth putting some of the headline primitives through that test directly.
● Atomic settlement. Atomic settlement collapses the gap between trade execution and finality, removing counterparty risk and freeing up collateral that would otherwise sit against unsettled trades.
● Shared ledgers. A shared ledger turns the back office's most persistent hidden cost, reconciliation, into a non event.
● Programmable money. Programmable money allows coupon payments, margin calls, and corporate actions to run as code rather than as a chain of manual instructions passed between counterparties.
● AMM pricing logic. AMM curve mathematics, stripped of its permissionless wrapper, reappears inside institutional infrastructure as the pricing engine for onchain FX and tokenised money market fund valuations.
Each of these improves a line on the profit and loss account, or removes a category of operational risk and its associated cost. None of them requires the institution adopting them to believe in decentralisation as an ideology.
This is worth being precise about. JPMorgan's permissioned blockchain for institutional deposits, and the tokenised money market funds now offered by BlackRock and Franklin Templeton, are not examples of large financial institutions dipping a toe into DeFi. They are institutions using blockchain infrastructure to do things they already do, settling interbank payments, managing fund subscriptions, distributing yield bearing instruments, but with materially better plumbing underneath. These deployments deliberately take the technical properties that make blockchains useful, programmability, transparency, atomic settlement, and deliberately discard the properties that make native DeFi work, open access, pseudonymity, trustless execution.
That is not a failure of ambition or a watered down compromise. It is a deliberate architectural choice, and it tells us a great deal about where this technology is actually heading inside regulated markets.
Different buyers, different rules
It would be a mistake for any leadership team to assume that institutional adoption is simply a larger distribution channel bolted onto existing DeFi infrastructure. Institutions do not evaluate protocols the way crypto native users do. When a bank or asset manager assesses a software vendor, an infrastructure partner, or long term ownership of a critical system, it applies its standard operating procedure for vendor risk, operational resilience, and compliance. Success within the DeFi community does not automatically translate into success with an institutional buyer.
Enterprises rarely buy the “best” technology in an abstract sense. They buy the technology that best fits existing workflows, existing risk models, and existing procurement processes.
This pattern is not unique to blockchain. Every powerful technology gets reshaped when it meets a heavily regulated, risk managed, liability averse institutional environment. It happened with the internet, which inside the enterprise became firewalls and private intranets. It happened with cloud computing, which inside the enterprise became private cloud, virtual private clouds, and formal accreditation regimes. It is happening now with artificial intelligence, which inside the enterprise is becoming internal deployments, data residency controls, and formal model governance frameworks. Blockchain will be no different, and institutions should plan on that basis rather than hoping the technology arrives on their terms.
The reconfiguration process: two axes institutions must work through
The reconfiguration of blockchain technology for institutional use runs along two axes. Any board or transformation committee assessing where to invest should map its own initiatives against both.
Axis one: compliance
Know your customer checks, anti money laundering controls, sanctions screening, investor accreditation, and regulatory reporting obligations are not negotiable for the overwhelming majority of regulated institutions. Permissionless systems, by design, do not natively accommodate these requirements. Institutions need the practical ability to freeze assets, reverse erroneous transactions, and identify counterparties on demand. DeFi was not built around those requirements, and accommodating them typically requires meaningful architectural change rather than a superficial compliance layer bolted on top. This picture may evolve: legislation such as CLARITY could eventually make it easier for institutions to access permissionless systems while still meeting their regulatory obligations. But today, almost every institution must evaluate blockchain infrastructure primarily through the lens of control, accountability, and operational risk.
Axis two: enterprise value delivery
This axis is frequently underappreciated by teams building in the space. Institutions are not adopting blockchain infrastructure because they have been persuaded of permissionlessness as a principle. They are adopting it because it compresses cost, reduces reconciliation friction, opens new distribution channels, or embeds the institution more deeply within an existing customer relationship. The value proposition has to be expressed in exactly those commercial terms, or it will not survive procurement, however technically elegant the underlying protocol.
Stablecoins offer perhaps the clearest illustration of both axes working together. Banks, payment providers, and fintechs increasingly treat stablecoins as useful settlement infrastructure, because they allow faster movement of value across networks and geographies. Very few of these institutions are embracing the broader philosophy of permissionless finance in doing so. They are adopting programmable dollars because they are commercially useful, not because they are attempting to recreate the financial system around DeFi's founding principles.
Circle's own evolution is instructive here. Its Arc initiative illustrates how blockchain infrastructure is increasingly being packaged specifically for institutional buyers, with an emphasis on compliance, operational controls, and trusted counterparties integrated into existing workflows, rather than on permissionless access and composability for their own sake. The value proposition on offer is not permissionlessness. It is faster settlement, global reach, and improved capital efficiency, delivered in a form institutions can actually take through their own procurement and risk processes.
Even an organisation as embedded in the existing financial architecture as SWIFT is increasingly framing its blockchain work through this same lens. Its efforts around tokenised asset interoperability are not attempts to displace existing financial institutions. They are attempts to help those institutions coordinate more efficiently with one another across the SWIFT network. The pattern recurs across the industry: blockchain adoption that strengthens established financial networks, rather than displacing them.
This is simply how powerful technologies behave when they meet large, established, well defended markets. Institutional leaders should expect no exception for blockchain.
What needs to happen: a practical agenda for institutional leadership
For boards, C-suite executives, and heads of business considering where to commit budget and attention, the reconfiguration process implies a fairly concrete agenda.
● Separate the technology decision from the philosophy decision. Adopting atomic settlement, programmable money, or tokenised collateral does not require an institutional view on decentralisation. Frame each initiative as a cost, risk, and distribution decision, and evaluate it accordingly. This keeps the conversation inside the institution's existing capital allocation and risk governance processes, rather than turning it into an ideological debate that stalls in committee.
● Build compliance into the architecture, not around it. Retrofitting know your customer checks, anti money laundering controls, sanctions screening, and reporting onto a permissionless design is expensive and fragile. Institutions that succeed will specify compliance, accountability, and reversibility requirements at the design stage, working with infrastructure partners who have already built for that constraint rather than partners who are promising to add it later.
● Map every candidate use case against both reconfiguration axes. A use case that improves cost or distribution but cannot satisfy compliance and control requirements will stall in procurement or legal review. A use case that satisfies compliance requirements but delivers no measurable commercial value will not survive a budget cycle. Only initiatives that clear both hurdles are worth prioritising.
● Treat vendor and infrastructure selection as an enterprise procurement exercise. Track record in the DeFi community is a weak predictor of fit for an institutional deployment. Evaluate infrastructure partners on operational resilience, regulatory positioning, data residency, governance, and long term support, exactly as you would any other critical infrastructure vendor.
● Resource this as a genuine transformation programme, not a pilot. The institutions gaining ground here, from JPMorgan's deposit infrastructure to BlackRock's and Franklin Templeton's tokenised funds, are running sustained, well resourced programmes with clear executive sponsorship, not isolated proofs of concept. A pilot with no path to production tells the market, and your own organisation, that this is not a serious priority.
● Watch the regulatory perimeter actively, but do not wait for it to move. Legislative developments such as the CLARITY Act may eventually widen what is legally possible for institutions engaging with permissionless systems. Build a monitoring function that tracks this, but do not delay commercially sound infrastructure decisions on the assumption that the rules will change in your favour.
● Keep the open ecosystem in view. Even institutions with no near term intention of touching permissionless DeFi should maintain visibility into that ecosystem. It remains the primary source of the primitives, market structures, and innovations that institutional infrastructure eventually absorbs, refined and repackaged for institutional use, often years after they first appear in the open market.
Two opportunities, and why most organisations should pick one
At the level of the industry as a whole, it would be a mistake for everyone to abandon one of these opportunities in favour of the other. At the level of an individual organisation, it is usually a mistake to pursue both at once.
Institutional adoption and open networks can reinforce one another at the level of the ecosystem. For most individual firms, however, they remain fundamentally different businesses. Building for institutions requires understanding procurement cycles, compliance regimes, controls, channel partners, and long sales cycles. Building for open networks requires optimising for developers, liquidity, composability, and network effects. The customer, the distribution model, the product requirements, and the metrics that define success are often entirely different between the two.
This is not a judgement that one opportunity is superior to the other. It is a call for clarity. Leadership teams and founders alike should be precise about which market they are actually serving, while recognising what unites both paths underneath: public blockchains functioning as neutral settlement infrastructure.
Partnering with institutions and building an adjacent, open financial system are not in tension with one another. Done well, each makes the other more valuable. The permissioned layer brings volume, legitimacy, and capital. The open layer keeps producing the primitives that the permissioned layer goes on to adopt. Convergence, when it eventually arrives, happens at the level of the rails, not because one system surrenders to the other.
Public blockchains may well become increasingly important as settlement rails, even as the applications built on top of them become progressively more permissioned over time.
Building programmable financial infrastructure
For institutions and infrastructure providers ready to move beyond individual use cases and think about platform strategy, there are broadly two approaches to building this new category of programmable financial infrastructure: building from scratch, or adapting existing crypto native products for institutional use.
Building from scratch
Networks such as Canton illustrate this route. Rather than adapting existing DeFi infrastructure, they are designed from the ground up around institutional requirements for privacy, compliance, and controlled interoperability. The objective is not to bring banks into DeFi. It is to use blockchain based coordination while preserving the governance, confidentiality, and operational controls that institutions require as a baseline, not as an afterthought.
Adapting existing infrastructure
Not every successful institutional strategy requires rebuilding from first principles. Morpho illustrates the opposite approach: rather than abandoning its DeFi native primitives, it has focused on making them easier for institutions and asset issuers to consume directly. Apollo's ACRED fund is a useful case in point, using Morpho as part of its onchain lending strategy and pairing a DeFi native lending primitive with institutional grade distribution, compliance, and fund structuring. The result is neither pure DeFi nor a fully isolated institutional stack, but a model in which institutions selectively adopt existing crypto infrastructure and package it to meet their own requirements for control, compliance, and distribution.
This emerging category is purpose built for institutional constraints. It draws on DeFi's technical foundations, but operates in a materially more permissioned and compliant manner, and is therefore necessarily distinct from what exists in either camp today.
Some teams, Morpho among them, have adapted crypto native infrastructure successfully for institutional use cases. Builders and institutional technology leaders should be careful not to mistake this for the default playbook, however. Institutions are a distinct customer segment with distinct requirements, and in many cases designing for those requirements from the outset will prove more effective than retrofitting a product originally built for open, permissionless networks.
Choosing between the two
For an institution deciding between these two paths, the practical question is usually one of time horizon and existing exposure. An institution with an urgent, well defined use case and limited appetite for platform risk will typically be better served by adapting a proven, institutionally adapted product. An institution building a long term, strategic infrastructure position, where control over the underlying architecture is itself a competitive advantage, has a stronger case for a purpose built, from scratch approach.
The opportunity institutions should not lose sight of
The innovations that institutions are adopting today did not originate inside banks, asset managers, or existing financial infrastructure providers. They emerged from open networks, where builders were free to experiment with new market structures, coordination mechanisms, and financial primitives without institutional constraints slowing the process down.
That distinction matters for anyone setting long term technology strategy inside a regulated institution. Institutions are not, on the available evidence, the industry's primary source of innovation. The permissioned layer is, more often than not, downstream of the open one.
This carries a strategic implication worth taking seriously at board level: if the wider industry becomes too narrowly focused on selling into banks and asset managers, it risks mistaking a large buyer category for the entire opportunity. TradFi is an important customer. It is not the only one, and institutions that want first access to tomorrow's primitives will need some form of ongoing visibility into where those primitives are being built today.
Designing for institutional requirements is a legitimate and valuable pursuit in its own right, but it is one lane, not the whole road. The organisations that endure, on either side of this divide, will be the ones that remain clear eyed about who they are actually building for and serving. Institutional adoption may represent a very large opportunity, but it is not simply an extension of DeFi, and success in one market does not guarantee success in the other.
Closing perspective
If your institution is building for, or buying into, this infrastructure, embrace that fully. Do not assume that traction within the crypto native community will automatically translate into enterprise adoption, or vice versa. Learn the customer, understand the buying process on both sides, and build or procure intentionally around institutional requirements rather than hoping the market converges on its own.
If your organisation is building for open networks, continue doing so with conviction. Do not abandon that work simply because institutions are currently the loudest buyers in the market.
These two tracks are complementary, not competitive. One adapts, commercialises, and scales proven innovations for institutional use. The other discovers those innovations in the first place. A significant share of this technology will almost certainly become part of the financial plumbing of the existing TradFi system over the coming years. That is not, however, the only future being built. Open networks remain the industry's most important source of experimentation, and many of the primitives that will shape tomorrow's institutional infrastructure are likely to emerge there first.
TradFi is not adopting DeFi. It is selectively adopting the parts of it that fit its own operating model, and reconfiguring them around control, compliance, and commercial value. The task for institutional leaders is not to chase every part of this market at once. It is to understand precisely which opportunity they are building for, or buying into, and to execute accordingly. The future may well run substantially on institutional infrastructure, but many of its most important innovations will continue to emerge first from the open networks that institutions are only now beginning to take seriously.
Date: July 16th, 2026
Document Analysis Prepared by: Eric Williamson Director of Compliance and Risk
The Digital Commonwealth Limited Classification: Industry Analysis - Public
EAJW © 2026 DCW Research. All rights reserved
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