ARK Invest research director Frank Downing argues that traditional financial institutions will likely adopt decentralized finance (DeFi) protocols rather than isolated, private blockchains.
ARK Invest is challenging the idea that big banks will only use private blockchains, arguing instead that true decentralized finance (DeFi) will become the primary infrastructure for global markets.
The debate over the future of financial services is heating up in the United States. While venture capital giant Andreessen Horowitz (a16z) recently suggested that Traditional Finance (TradFi) mostly wants blockchain technology without the "decentralized" part, the team at Cathie Wood’s ARK Invest strongly disagrees. This disagreement centers on whether the future of money will be open and public or closed and private.
The Great Debate: Public vs. Private Blockchains
For years, many US banks and financial institutions experimented with "permissioned" blockchains. These are private networks where a central authority controls who can participate. Critics argue these are simply glorified databases that don't offer the real benefits of crypto. DeFi (decentralized finance), which uses public networks like Ethereum to provide financial services without a middleman, offers a different path forward for the American economy.
ARK Invest suggests that the efficiencies found in public protocols are too large for Wall Street to ignore. Rather than building their own silos, institutions may find it cheaper and faster to plug into existing liquidity pools on public networks. This shift would represent a massive change in how capital markets operate in the US.
"The history of technology shows that open, interoperable standards eventually win out over closed, proprietary systems because they attract more developers and innovation."
Why TradFi is Moving Toward DeFi Rails
Recent data from CoinGecko shows that the market cap of RWA (real-world assets) being tokenized is growing rapidly. Tokenization is the process of turning physical or traditional assets, like US Treasury bonds, into digital tokens on a blockchain. This allows these assets to be traded 24/7, providing liquidity (the ease of buying or selling an asset without changing its price) that the New York Stock Exchange cannot currently match.
There are several reasons why ARK believes public DeFi will win:
- Interoperability: Different apps can talk to each other easily on public networks.
- Cost Savings: Removing intermediaries reduces the fees paid by everyday American investors.
- Transparency: All transactions are visible on a public ledger, reducing the risk of hidden financial failures.
Institutional Adoption Steps
The path to full adoption isn't instant. Most US firms are following a specific progression as they engage with DLT (distributed ledger technology), which is the underlying tech behind crypto. This progression usually looks like this:
- Education and internal research on Smart Contracts (self-executing code).
- Custody of digital assets through regulated US partners.
- Issuing private assets on public test networks.
- Full integration with public DeFi protocols for settlement and clearing.
What This Means for USA Investors
For the average US investor, this debate is more than just technical—it impacts your portfolio and your taxes. The IRS (Internal Revenue Service) currently treats most DeFi transactions as property sales, meaning every swap can trigger a capital gains tax event. If major banks move to DeFi rails, we may see more pressure on Congress to clarify tax laws for digital assets.
Furthermore, the SEC (Securities and Exchange Commission) and the CFTC continue to debate which parts of DeFi fall under their jurisdiction. Currently, investors can access many of these themes through regulated US exchanges like Coinbase, Kraken, or Gemini. However, if ARK's vision comes true, your 401(k) might one day be managed via a smart contract on a public blockchain, potentially lowering your management fees and increasing your returns.
The Future of Tokenized Assets
The core of the ARK argument is that "blockchain not crypto" is a failed mantra. They believe that you cannot have the security and efficiency of a blockchain without the economic incentives of a decentralized network. As more US-based ETFs (Exchange Traded Funds) for Bitcoin and Ethereum launch, the bridge between TradFi and DeFi becomes shorter every day. US investors should watch for more legacy banks to pivot from "private tests" to "public deployments" in the coming year.
Key Takeaways
- Challenge the narrative that institutions will only utilize permissioned, private blockchain networks.
- Recognize that public DeFi protocols offer better liquidity and transparency for US institutional investors.
- Monitor how current financial giants are shifting toward open-source blockchain rails.
- Evaluate the long-term role of Ethereum and Solana in processing traditional asset transactions.