Decentralizing Finance

9Institutional DeFi

In this chapter we'll synthesize the different components of what has been covered so far regarding DeFi innovations. This includes aspects such as AMMs, CBDCs, tokenized assets, tokenized deposits, and tokenized securities. By tying these threads together, we can gain insight into what the future institutional use of DeFi could look like.

Institutions have different requirements from individuals when adopting technology and working with counterparties. Licensed financial institutions are subject to stringent regulations such as KYC, AML, and technology risk compliance. This has made it challenging for them to participate in web3 and DeFi.

9.1 Considerations for Institutions to Participate in DeFi

Financial institutions interested in participating in DeFi or building a DeFi product will need to consider the following:

• Regulatory compliance: Financial institutions will need to ensure that they are compliant with all applicable regulations. This includes ensuring that they have the appropriate KYC and AML procedures in place.
• Counterparty risk: Financial institutions will need to assess the counterparty risk associated with DeFi protocols. This includes assessing the risk of hacks, smart contract vulnerabilities, and other security risks.
• Technology risk management: Financial institutions will need to have a robust technology risk management framework in place to manage the risks associated with DeFi. This includes ensuring that they have the appropriate ...