For years, decentralized finances, or “defi,” have been treated in the traditional financial world as nothing more than speculative casinos, frivolous and potentially destabilizing. That perception is changing rapidly. Hedge funds are experimenting with liquidity pools on the chain, with key asset managers experimenting with blockchain payments, piloted by digital asset financing companies (DATS) chasing the strategy’s hugely successful Bitcoin balance sheet, creating yield and revenue value for investors. Wall Street’s interest is no longer a hypothesis. Currently, institutional exposure to DEFI is estimated at around $41 billion, but that number is expected to increase. EY estimates that 74% of institutions will be involved in DEFI over the next two years.
This reflects broader macro trends. Traditional financial institutions are beginning to see Defi as a programmable infrastructure that can modernize the market rather than a dangerous frontier. There are two appeals. The first is yield. Liquidity strategies in the chain that can turn native staking rewards, tokenized Treasury, and idol capital into productive assets are only possible due to the unique capabilities of the technology itself. The second is real-time payments, provable solvency, and automatic compliance built directly into your code.
However, enthusiasm alone does not bring defi to the mainstream of finance. Engagement rules must evolve for agencies to participate at scale and be comfortable for regulators. The challenge is not to renovate Defi into a legacy category, but to recognize unique strengths such as programmable yields, code-enforced compliance, and payment systems that operate in real time.
Why the agency is paying attention
For institutional investors, the most direct attraction is yield. In a low margin environment, the chances of generating incremental returns are important. Custodians may lead client assets to programmable contracts like crypto “vults” that provide staking rewards and chain liquidity strategies. Asset managers can design tokenized funds that route stubbly coins to the safes of tokenized Treasury invoices. Publicly available companies that hold digital assets on their balance sheets may deploy these assets into their Defi strategies to obtain protocol-level yields and convert idle reserves into engines for shareholder value.
Beyond yields, Defi infrastructure provides operational efficiency. Rules regarding centralized restrictions, withdrawal queues, or protocol eligibility can be written directly in code to reduce reliance on manual monitoring and costly adjustments. Risk disclosures can be automatically generated, not quarterly reports. This combination of new forms of yield and access to low compliance friction explains why Wall Street is becoming more and more excited.
Compliance as a technical property
From a regulatory perspective, the central issue is compliance. In legacy finance, compliance is usually retroactive and is built around policy, proof, and auditing. Defi allows you to design compliance directly into financial products.
Smart Contracts, the self-executing software that supports Defi, can automatically run GuardRail. The agreement may only allow client (KYC)-verified accounts to participate. If fluidity falls below the threshold or triggers a trigger alert when an abnormal flow appears, the withdrawal may be stopped. For example, Vaults can use such protection measures to route assets to predefined strategies. Whitelisted approved protocols, implementation of exposure caps, or withdrawal throttle is imposed. While the chain is transparent to users and regulators.
As a result, it is verifiable and translated in real time, rather than lacking compliance. Supervisors, auditors and counterparties can inspect positions and rules in real time, rather than relying on post-facto disclosure. This is something that game-changing shift regulators should be welcomed and not resisted.
Safer products, smarter design
Critics argue that Defi is inherently dangerous and points to episodes of leverage, hacks and protocol failures. That critique benefits when the protocol is not experimental or audited. However, programmable infrastructure paradoxically can reduce risk by pre-constraining behavior.
Consider the bank that offers staking services. Rather than relying on discretionary decisions by the manager, validator selection criteria, exposure restrictions, and conditional withdrawals can be embedded in your code. Alternatively, use an asset manager that structures tokenized funds. Investors can see in real time how their strategy is deployed, how fees are incurred, and what returns will be generated. These features are not possible to replicate in traditional pooled vehicles.
While monitoring remains essential, supervision tasks will change. Regulators are no longer limited to paper compliance reviews after the facts. Instead, you can directly examine the integrity of the code standards and protocols. This properly made shift increases systematic resilience while reducing compliance costs.
Why FedNow Access is Important
The 2023 launch of FedNow, a real-time payment system, shows that it is at a crisis. For decades, only the bank and a small number of chartered entities were able to connect directly to the Fed’s core settlement infrastructure. Everyone else had to route the intermediary. Today, crypto companies are similarly excluded.
That’s important because Defi can’t achieve institutional scale without a ramp into the US dollar system. Stablecoins and tokenized deposits work best when they can be redeemed directly for dollars in real time. Without access to FedNow or Master accounts, non-banking platforms must rely on the correspondent’s bank or offshore structure.
Programmable infrastructure may make FedNow access more secure. Stablecoin issuers or Defi financial products connected to FedNow may enforce overcooperative rules, capital buffers, and AML/KYC restrictions directly in the code. Redemption is tied to instant FedNow transfers, allowing all on-chain tokens to match 1:1 with the reserve. Supervisors can continuously verify solvency as well as periodic proofs.
A more constructive approach, therefore, is risk layer access. If the platform can be demonstrated through an auditable agreement where reserves are fully secured, Money Laundering Anti-Money Laundering (AML) control is ongoing and allows withdrawals to be automatically drawn out during stress. The Fed’s own 2022 guidelines for account access highlight transparency, operational integrity, and systematic safety. A well-designed DEFI system can meet all three.
Competition orders
These steps do not open the floodgates indiscriminately. Rather, they will establish a pathway for responsible participation. There, agencies can engage in Defi based on clear rules and verifiable criteria.
Other jurisdictions are not waiting. If US regulators take an exclusive stance, American companies risk transferring their status to their global peers. That could mean not only a competitive disadvantage for Wall Street, but also a missed opportunity for US regulators to form new international standards.
Defi’s promise is not to bypass the surveillance, but to encode it. For agencies, it provides access to new forms of yield, reduced operational costs, and increased transparency. For regulators, it allows real-time oversight and stronger systematic safeguards.
Wall Street wants. Technology ready. What remains is to provide a framework that allows policymakers to engage in the institution responsibly. Leading by the US, we can ensure that defi evolves as a tool for stability and growth, rather than assumptions and vulnerabilities. If you are late, others will set rules and enjoy the benefits.