a16z: Traditional Finance Doesn’t Want DeFi, It Only Wants the Blockchain as Infrastructure

Original Author: a16z Crypto

Original Compilation: TechFlow

Introduction: Many believe that traditional finance will embrace DeFi, and the two will ultimately merge into some elegant hybrid. The truth is harsher: Wall Street only wants to use blockchain to reduce costs, improve efficiency, and capture customer relationships, but will never give up control. This is not a compromise, but a carefully designed architectural choice, and it is giving birth to a new category — programmable financial infrastructure.

There is a near-classic future narrative circulating in the crypto industry: DeFi and traditional finance will merge, permissionless liquidity meets institutional distribution power, eventually giving birth to some elegant hybrid that combines the best of both — the new system replaces the old.

This is a comforting story. But it’s largely wrong.

A more honest version is: as long as blockchain can make existing traditional finance businesses better, it will be used. Not because of embracing decentralization, but because it's a compelling cost-reduction story — this technology happens to cut costs, improve settlement, expand distribution, and tighten its control over customer relationships.

This means institutions are not merging with DeFi. Instead, they are selectively using the parts of DeFi that fit their operational constraints and discarding those that don't; they are reconfiguring DeFi around institutional needs. The result will likely look neither like traditional finance nor today's DeFi. We are beginning to see the emergence of a new category, built on blockchain rails but optimized for institutional constraints: programmable financial infrastructure.

As the regulatory framework matures, this dynamic may evolve. Legislation like the CLARITY Act could eventually make it easier for institutions to directly access permissionless systems. But no matter what becomes legally possible, traditional finance's risk posture won't reset overnight. Institutions will still adopt technology through the lens of cost, risk, control, and operational fit — which is why this presents the industry with two opportunities, not one.

The first opportunity is to help institutions adopt the infrastructure they are ready for today. Every primitive institutions adopt — from atomic settlement to programmable money to tokenized collateral — validates the technology, builds shared rails, and brings real transaction volume and capital on-chain.

The second opportunity is to continue building the open, crypto-native financial system that institutions are not yet ready to use.

These are not competing bets. They can and should coexist in parallel, and if done well, each will strengthen the other. Open networks and ecosystems will continue to produce the primitives, markets, and innovations that institutions will eventually adopt. If both succeed, convergence will happen naturally — not because one system completely replaces the other, but because both increasingly rely on the same underlying infrastructure.

What Traditional Finance Is Actually Doing

For traditional finance to adopt a primitive, two things must happen simultaneously: it must improve cost, risk, or distribution, and be compatible with control and accountability. The primitives institutions discard — open access, pseudonymity, immutable execution — pass the first test but fail the second. This is why adoption patterns are predictable rather than random, and why builders can treat it as a design test. That is, if a feature delivers value only by removing institutional control, no matter how elegant it is, it will almost certainly be reshaped or rejected.

Let’s test some primitives. Atomic settlement compresses the gap between transaction and finality, eliminates counterparty risk, and frees up collateral that institutions park for unsettled trades. Shared ledgers turn the biggest hidden cost of back offices — reconciliation — into something that doesn't need to be done. Programmable money turns coupon payments, margin calls, and corporate actions into code running, not a string of manual instructions. AMM curve mathematics, stripped of its permissionless shell, reappears as a pricing engine for on-chain forex and the net asset value of tokenized money market funds.

Each improves the P&L or eliminates an operational risk and its associated costs, but none require institutions to trust decentralization. So let's be precise about what is happening with JPMorgan's institutional deposit permissioned blockchain or BlackRock and Franklin Templeton's tokenized money market funds: these are not corporate forays into DeFi. They are using blockchain to do what they already do — settle interbank payments, manage fund subscriptions, distribute yield-bearing instruments — but with better plumbing. These deployments use the technical attributes of blockchain (programmability, transparency, atomic settlement) and deliberately discard the attributes that make native DeFi work (open access, pseudonymity, and trustless execution).

This is not a failure or compromise. This is a deliberate architectural choice, and it tells us a lot about where this is heading.

Different Buyers, Different Rules

It would be a mistake to assume that institutional adoption is just a larger distribution channel for existing DeFi infrastructure. Institutions evaluate protocols differently than crypto-native users. When institutions consider software vendors, infrastructure partners, operational risk, compliance controls, and long-term ownership of critical systems, they follow standard operating procedures. As a result, success in DeFi does not automatically translate into success with institutions.

Enterprises rarely buy the "best" technology. They buy what best fits their existing workflows, risk models, procurement processes, etc.

Any technology entering a highly regulated, risk-managed, liability-averse institutional environment will be shaped by that environment. This happened to the internet (corporate firewalls, private intranets). It happened to cloud computing (private clouds, VPCs, FedRAMP). It is happening to AI (on-premises deployment, data residency requirements, model governance). Blockchain is no different.

Reconfiguration occurs along two axes:

Compliance: KYC, AML, sanctions screening, investor accreditation, and regulatory reporting requirements are non-negotiable for most institutions. Permissionless systems are not natively compatible with these requirements. Institutions need the ability to freeze assets, reverse transactions, and identify counterparties. DeFi was not initially designed around these requirements, and adapting to them often requires meaningful architectural changes. This could evolve. For instance, CLARITY might make it easier for institutions to access permissionless systems while meeting regulatory requirements. But today, most institutions must evaluate blockchain infrastructure through the lens of control, accountability, and operational risk.

Enterprise Value Delivery. This axis is often underestimated. Institutions adopt blockchain not because they believe in permissionlessness as a principle. They adopt it because it compresses costs, reduces reconciliation friction, creates new distribution channels, or allows them to embed themselves deeper in customer relationships. The value proposition must be articulated in these terms, or it won't pass procurement.

Stablecoins might be the clearest example. Banks, payment providers, and fintechs increasingly view them as useful settlement infrastructure because they allow dollars to move faster across networks and geographies. But few embrace the broader philosophy of permissionless finance. They adopt programmable dollars because they are useful, not because they are trying to rebuild the financial system around DeFi principles.

Circle's evolution is a fitting illustration. Arc reflects how blockchain infrastructure is increasingly being packaged for institutional buyers: emphasizing compliance, operational control, trusted counterparties, and integration into existing workflows, rather than permissionless access and composability. The value proposition isn't permissionlessness for its own sake. It's faster settlement, global reach, and improved capital efficiency, delivered in a form that institutions can actually adopt.

Even organizations like SWIFT are increasingly framing blockchain through this lens. Their efforts in tokenized asset interoperability are not about trying to replace existing financial institutions. They are about improving how existing institutions coordinate with each other using the SWIFT network. This pattern repeats: blockchain adoption is strengthening established financial networks, not replacing them.

This is how powerful technology evolves when it encounters large, established markets.

Two Opportunities for Builders

At the industry level, it would be a mistake for everyone to abandon one opportunity for the other. At the company level, it would be a mistake to try and pursue both simultaneously.

Institutional adoption and open networks can mutually reinforce each other at the ecosystem level. But for most teams, they remain fundamentally different businesses. Building for institutions requires understanding procurement, compliance, control, channel partners, and long sales cycles. Building for open networks requires optimizing for developers, liquidity, composability, and network effects. The customers, distribution models, product requirements, and success metrics are often entirely different.

This doesn't mean one opportunity is better than the other. It simply means founders should be clear about which market they are serving, and recognize what unites them underneath: public chains as a neutral settlement layer.

Working with institutions and building an adjacent financial system are not contradictory. If done right, each makes the other more valuable. The permissioned layer brings volume, legitimacy, and capital; the open layer continues to produce the primitives that the permissioned layer will adopt next. When convergence comes, it happens on the rails — not by one system surrendering to another.

Public chains may become increasingly important settlement rails, even as the applications built on top of them become increasingly permissioned.

Building for Programmable Financial Infrastructure

When building for this new programmable financial infrastructure, there are two approaches to consider: building from scratch or adapting existing products.

Consider a network like Canton. Instead of adapting existing DeFi infrastructure, it was specifically designed around institutional requirements for privacy, compliance, and controlled interoperability. The goal is not to bring banks into DeFi. It is to use blockchain-based coordination while retaining the governance, confidentiality, and operational control that institutions need.

Not every successful institutional strategy requires a rebuild from scratch. For example, Morpho is taking the opposite approach. Instead of abandoning its DeFi primitives, Morpho focuses on making it easier for institutions and asset issuers to use them. For instance, Apollo's ACRED fund uses Morpho as part of its on-chain lending strategy, pairing DeFi-native lending primitives with institutional-grade distribution, compliance, and fund structures. The result is neither pure DeFi nor a completely isolated institutional stack. It is a model where institutions selectively adopt existing crypto infrastructure while packaging it in ways consistent with their own control, compliance, and distribution requirements.

This new category is tailored for institutional constraints. It draws from DeFi but operates in a more permissioned, more compliant manner, and as such, is necessarily different from what exists today.

Some teams, like Morpho, have successfully adapted crypto-native infrastructure for institutional use cases. But builders shouldn't mistake this for the default playbook. Institutions are a distinct customer base with distinct requirements. In many cases, designing for those requirements from the ground up will prove more effective than adapting products originally built for open networks.

The Continued Opportunity to Build in DeFi

The innovations that institutions are adopting today did not originate within banks, asset managers, or existing financial infrastructure. They emerged from open networks, where builders are free to experiment with new market structures, coordination mechanisms, and financial primitives.

This distinction is important. Institutions are not the primary source of industry innovation: the permissioned layer is typically downstream of the open layer.

This brings us to a more important strategic point: if our industry becomes overly focused on selling to banks and asset managers, we risk mistaking a large buyer category for the entire opportunity. Traditional finance is an important customer. But it is not the only one.

Designing for institutional requirements is a legitimate and valuable pursuit, but it is just one lane, not the whole road. The companies that endure will be those that remain sober about who they are building for. Institutional adoption might be a big opportunity, but it is not simply an extension of DeFi. Success in one market does not guarantee success in the other.

If you are building for institutions, embrace it fully. Don't assume crypto-native appeal will automatically translate into enterprise adoption. Know your customer, understand the buying process, and build deliberately around institutional requirements.

If you are building for open networks, continue doing so. Don't abandon your vision just because institutions are the loudest buyers in the market today.

Remember: these are complementary, not competitive. One adapts, commercializes, and scales proven innovations. The other discovers them. One version of this technology will almost certainly become part of the financial plumbing for existing traditional finance systems. But that is not the only future being built. Open networks remain the industry's most important source of experimentation and innovation, and many of the primitives that will shape tomorrow's institutional infrastructure will likely emerge there first.

Traditional finance is not adopting DeFi. It is selectively adopting the parts that fit its model. The opportunity for builders is not to chase every market, but to understand which one they are building for. And execute accordingly. The future may indeed run on institutional infrastructure, but many of its most important innovations will continue to emerge from open networks.