Top 5 Challenges Faced by Institutions to Adopt Cryptocurrencies

15 July 2021

The Evolving Cryptocurrency Narrative

For the better part of the last decade, traditional institutions shunned cryptocurrencies, either labeling them as scams or categorizing them as too volatile and unregulated for formal investment. Things have changed over the last two years, however, and large, blue-chip financial institutions are finally taking a more positive approach to investing in innovative, blockchain-powered technologies.

For example, JP Morgan recently launched a cryptocurrency exposure basket of Bitcoin proxy stocks as an investment option for its clients, and Visa and PayPal also recently opened Bitcoin transactions on their platforms, connecting hundreds of millions of new users to cryptocurrencies.

Other examples of institutional interest in cryptocurrencies include Grayscale Investments LLC, TeslaStarbucks, Microsoft, Ark Invest, Goldman Sachs, and BlackRock, the world’s largest asset manager, all of which are large, well-established, and recognized corporations that now accept or transact in Bitcoin and/or other cryptocurrencies. Some of these are institutions with tens of billions of dollars’ worth of assets under management, and they are causing major ripples in crypto markets. Specifically for decentralized finance (DeFi), there was about $1 billion locked in DeFi smart contracts in June 2020, a figure which grew to almost $90 billion by May 2021 — a clear indicator of where things are headed.

These investments are changing the narrative of adoption and penetration when it comes to crypto and DeFi applications. At the same time, blockchain-powered financial services products are also slowly maturing, providing investors with seamless, secure, fast, and low-cost access to a wide range of crypto-based investment opportunities.

Obstacles and Challenges

There still are, however, major hurdles that large, established institutions such as banks, hedge funds, and investment houses face when it comes to entering and operating in the crypto space. From regulatory and compliance issues to tax hurdles, security challenges, and governance complications, it can be difficult for traditional financial institutions to grapple with how crypto and DeFi products and services operate.

Below we provide examples of how traditional financial services companies face challenges in different areas when it comes to integrating or adopting DeFi solutions.

Centralization Risks

Traditional, centralized financial institutions can unilaterally approve and execute transactions, but in decentralized finance, the network’s governance and consensus algorithm approves transactions. This can pose a serious adoption hurdle for centralized organizations that are unfamiliar with decentralized approval processes.

Centralization risks also exist in the form of protocol access to admin keys that can be used to lock user funds, change system parameters, or unilaterally approve/prevent other operations. Custodial risks are included here. This is why secure smart contracts and effective key management solutions are so important..

Smart Contract/Security Risks

The key signing technologies used for blockchain security that make it harder to attack the system and execute fraudulent or unapproved transactions do not directly integrate with the transaction approval protocols of traditional finance.

Also, smart contract vulnerabilities and exploits can lead to massive losses of user funds unless these contracts and related systems and operations are thoroughly tested and routinely upgraded and maintained. The dForce reentrancy hack of April 2020 in which a hacker stole $25 million worth of user funds is a prime example of smart contract vulnerabilities.

Smart contract risks also include how long specific contracts have been live on the mainnet without incident and the number of code audits that have been performed.

Scalability

DeFi applications are designed for quick rollout and performant scaling to large numbers of users. Quickly onboarding new users and delivering robust offerings to them with traditional financial infrastructures is next to impossible.

A lack of scalability of traditional financial products is one reason we see so much institutional interest in DeFi applications. When it comes to banking the unbanked, traditional financial services companies simply do not have the agility and cannot offer the customization or flexibility to provide services to people from diverse backgrounds with unique needs, many of which traditional services cannot cater to due to compliance or regulatory issues.

Financial Risks

Financial risks pertaining to the volatility of collateralized assets and borrowing/profit rates must also be managed, which can be difficult to do given the notorious volatility of the crypto space. It is of little use to take user funds and make a loss, or to invest funds in assets that deliver mediocre returns when the rest of the market is performing well.

Traditional financial institutions do not have access to the self-balancing, automated investment strategies that are standard on many DeFi platforms, and this puts these institutions at a significant disadvantage when it comes to attracting user funds.

Regulatory/Compliance Risks

A lack of clarity in terms of compliance and regulation makes it difficult for traditional financial services organizations to enter and operate in new markets while remaining compliant with applicable rules and laws. This is particularly important when it comes to overcoming the tax and KYC/AML hurdles and implications of offering financial services to the unbanked.

These examples are just a small sample of why traditional financial services companies have such a hard time entering and safely operating in the DeFi space. However, Unido was built from the ground up to address precisely these types of issues, and more.

Unido Connect — Bridging Institutions to Crypto and DeFi

Unido, the enterprise blockchain platform for decentralized capital markets, was designed to help these institutions overcome these issues by bridging the gaps between cryptocurrency-powered DeFi and traditional, fiat-based finance.

With Unido, financial services companies can securely manage their assets. Unido also provides access to DeFi networks, institutional compliance and governance services, and a holistic view of wallets, customers, and assets to empower better investment, management, and trade decisions. Unido also helps banks, brokers, and exchanges provide crypto banking facilities to their customers. As a stand-alone crypto bank, Unido easily integrates with legacy fiat systems and centralized CRMs, providing users with cryptocurrency risk management and blockchain security services.

Unido Partnerships

Alongside the release of secure and performant DeFi services and applications, Unido has also entered into multiple corporate partnerships to build out the Unido ecosystem.

In March, Unido partnered with EQI Bank, a global digital banking service that will use a customized version of Unido Insto to deliver crypto custody and trading products to EQI Bank clients.

Unido also has a partnership with Moonstake, a crypto staking service, and Flourishing Capital, an AI-powered predictive volatility analysis firm. These partnerships will help Unido spread awareness, accelerate the adoption of blockchain and distributed ledger technologies, and empower data-driven investment decisions for its clients.

Final Thoughts

Institutional investors have by no means been early adopters of blockchain tech, but they have finally come around to the self-evident benefits of cryptocurrencies. As institutional investments in blockchain and cryptocurrencies continue to grow, there will be an increased need to bridge the gaps between traditional legacy systems and a new financial order run by blockchain and cryptocurrencies.

Unido — with its suite of DeFi services and growing ecosystem of partnerships — is strategically positioned to help these organizations evolve with the times and continue to remain relevant in 2021 and beyond.

Learn more about Unido and trends in the decentralized capital markets space by visiting https://www.unido.us/

Unido Opinion, Unido, Institutional Investor, Crypto Adoption, Universido
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