For years, decentralized finance, or “DeFi,” was treated in traditional finance circles as little more than a speculative casino, frivolous and potentially destabilizing. That perception is changing fast. Hedge funds are experimenting with on-chain liquidity pools, major asset managers are piloting blockchain settlement, and digital asset treasury companies (DATs), chasing the wildly successful strategy of Strategy’s Bitcoin balance sheet, are turning to DeFi to generate yield and return value to investors. Wall Street’s interest is no longer hypothetical. Currently, institutional exposure to DeFi is estimated at about $41 billion, but that number is expected to grow: EY estimates that 74% of institutions will engage with DeFi in the next two years.
This reflects a broader macro trend: traditional financial institutions are starting to view DeFi not as a risky frontier, but as programmable infrastructure that could modernize markets. The appeal is twofold. First is yield: native staking rewards, tokenized Treasuries, and on-chain liquidity strategies that can turn idle capital into productive assets, something only possible due to the unique features of the technology itself. Second are efficiency gains: real-time settlement, provable solvency, and automated compliance built directly into code.
Yet enthusiasm alone will not bring DeFi into the financial mainstream. For institutions to participate at scale, and for regulators to get comfortable, the rules of engagement must evolve. The challenge is not to retrofit DeFi into legacy categories, but to recognize its distinctive strengths: programmable yield, compliance enforced in code, and settlement systems that operate in real time.
Why Institutions Are Paying Attention
For institutional investors, the most direct attraction is yield. In a low-margin environment, the prospect of generating incremental returns matters. A custodian might channel client assets into a programmable contract like a crypto “vault” that delivers staking rewards or on-chain liquidity strategies. An asset manager could design tokenized funds that route stablecoins into vaults of tokenized Treasury bills. A publicly traded company holding digital assets on its balance sheet might deploy those assets into DeFi strategies to earn protocol-level yield, transforming idle reserves into an engine for shareholder value.
Beyond yield, DeFi infrastructure offers operational efficiency. Rules about concentration limits, withdrawal queues, or protocol eligibility can be written directly into code, reducing reliance on manual monitoring and costly reconciliation. Risk disclosures can be generated automatically rather than through quarterly reports. This combination of access to new forms of yield and lower friction in compliance explains why Wall Street is increasingly excited.
Compliance as a Technical Property
From a regulatory perspective, the central issue is compliance. In legacy finance, compliance is typically retrospective, built around policies, attestations, and audits. In DeFi, compliance can be engineered directly into financial products.
Smart contracts, the self-executing software that underpins DeFi, can enforce guardrails automatically. A contract might permit participation only by know-your-customer (KYC)-verified accounts. It could halt withdrawals if liquidity falls below a threshold, or trigger alerts when abnormal flows appear. Vaults, for example, can route assets into predefined strategies with such safeguards: whitelisting approved protocols, enforcing exposure caps, or imposing withdrawal throttles. All while being transparent to users and regulators on-chain.
The result is not the absence of compliance, but transforming it into something verifiable and real-time. Supervisors, auditors, and counterparties can inspect positions and rules in real time rather than relying on after-the-fact disclosures. This is a game-changing shift regulators should welcome, not resist.
Safer Products, Smarter Design
Critics argue that DeFi is inherently risky, pointing to episodes of leverage, hacks, and protocol failures. That critique has merit when protocols are experimental or unaudited. But programmable infrastructure can, paradoxically, reduce risk by constraining behavior up front.
Consider a bank offering staking services. Rather than relying on discretionary decisions by managers, it can embed validator selection criteria, exposure limits, and conditional withdrawals into code. Or take an asset manager structuring a tokenized fund: investors can see, in real time, how strategies are deployed, how fees are accrued, and what returns are generated. These features are impossible to replicate in traditional pooled vehicles.
Oversight remains essential, but the supervisory task changes. Regulators are no longer confined to reviewing paper compliance after the fact; instead, they can examine code standards and the integrity of protocols directly. Done properly, this shift strengthens systemic resilience while reducing compliance costs.
Why FedNow Access Is Critical
The Federal Reserve’s 2023 launch of FedNow, its real-time payment system, illustrates what is at stake. For decades, only banks and a handful of chartered entities have been able to connect directly to the Fed’s core settlement infrastructure. Everyone else has had to route through intermediaries. Today, crypto firms are similarly excluded.
That matters because DeFi cannot achieve institutional scale without a ramp to the U.S. dollar system. Stablecoins and tokenized deposits work best if they can be redeemed directly into dollars in real time. Without access to FedNow or master accounts, nonbank platforms must rely on correspondent banks or offshore structures, arrangements that add costs, slow down settlement, and increase the very risks regulators are most concerned about.
Programmable infrastructure could make FedNow access safer. A stablecoin issuer or DeFi treasury product connected to FedNow could enforce over-collateralization rules, capital buffers, and AML/KYC restrictions directly in code. Redemptions could be tied to instant FedNow transfers, ensuring every on-chain token is matched 1:1 with reserves. Supervisors could verify solvency continuously, not just through periodic attestations.
A more constructive approach, therefore, would be risk-tiered access. If a platform can demonstrate through auditable contracts that reserves are fully collateralized, anti-money laundering (AML) controls are continuous, and withdrawals automatically throttle during stress, it arguably presents less operational risk than today’s opaque nonbank structures. The Fed’s own 2022 guidelines for account access emphasize transparency, operational integrity, and systemic safety. Properly designed DeFi systems can meet all three.
A Competitive Imperative
These steps would not open the floodgates indiscriminately. Rather, they would establish a pathway for responsible participation, where institutions can engage with DeFi under clear rules and verifiable standards.
Other jurisdictions are not waiting. If U.S. regulators take an exclusionary stance, American companies risk ceding ground to their global peers. That could mean not only a competitive disadvantage for Wall Street, but also a missed opportunity for U.S. regulators to shape emerging international standards.
The promise of DeFi is not to bypass oversight but to encode it. For institutions, it offers access to new forms of yield, reduced operational costs, and greater transparency. For regulators, it enables real-time supervision and stronger systemic safeguards.
Wall Street wants in. The technology is ready. What remains is for policymakers to provide the framework that allows institutions to participate responsibly. If the United States leads, it can ensure DeFi evolves as a tool for stability and growth rather than speculation and fragility. If it lags, others will set the rules, and reap the benefits.
Source: https://www.coindesk.com/opinion/2025/09/23/wall-street-wants-in-on-defi-here-s-how-to-make-it-happen
