Short Blog.
New technology rarely disrupts industries overnight. Instead, it is first used by existing players in established markets to gain a competitive edge. On-chain finance is no different. While decentralized finance (DeFi) and public blockchains promise a future of open financial networks, the immediate growth will come from closed, permissioned ledgers operated by financial institutions.
Simon Taylor, in his analysis of on-chain finance, highlights this transition. Distributed Ledger Technology (DLT) offers immense opportunities to improve financial flows, but trust will be managed within controlled networks like JPMorgan’s Kinexsys rather than fully public chains. Why? Because closed ledgers align with existing legal frameworks and established multilateral agreements—some of which take years to negotiate.
Why Investment Is Flowing Into Closed Ledgers
Financial incumbents are not standing still. They are leveraging DLT to enhance efficiency while maintaining control over trust, governance, and risk management. This is why IBM is investing heavily in Hyperledger Fabric, the technology underpinning closed blockchain networks used by banks and insurers worldwide.
Consider We.Trade, a blockchain trade finance platform backed by major banks like HSBC and Deutsche Bank, or B3i, a consortium of global insurers using Hyperledger Fabric for reinsurance contracts. These are not radical new financial systems—they are evolutions of existing frameworks, enabled by DLT’s ability to improve security, efficiency, and automation.
The Role of Trust and Governance
For financial institutions, trust isn’t just about cryptographic security—it’s about legal enforceability, governance, and risk management. Closed ledgers provide precise control over member participation, roles, and activities within a network. The promise of smart contracts isn’t just automation; it’s about aligning financial transactions with legally enforceable agreements. Banks understand this and intend to maintain their role in managing systemic risk.
The Stablecoin Perspective
Stablecoins introduce a new risk model. While I’m a big fan of stablecoins, it’s important for users to understand the trade-off. When someone buys USDC, they aren’t relying on a traditional bank to manage risk—they are shifting that responsibility to Circle. This is a fundamental change in financial liability and governance, with lessons to be learned from past experiences with Tether.
The Future of On-Chain Finance
While public blockchain networks hold long-term potential, the financial industry’s immediate focus is on closed, regulated ecosystems that align with existing legal agreements and regulatory oversight. The banks and financial giants investing in these systems today are shaping the future of finance. The first phase is existing participants improving existing systems and processes. The next is managing risk in new ways. Nether dismantle the old order, but by upgrading it.
I asked Chat GPT to differentiate the 2 and received this concise table below
For a deeper dive into the evolution of on-chain finance, Simon Taylor’s insights are a must-read: On-Chain Finance. Simon and I agree on stablecoins, but may differ on closed ledgers.
Also see my 3 related posts
The Economic Models of Identity and Trust (2024)
Near Term Impacts of DLT and Chain of Trust in Financial Services (2022)
Identity Models, Government and Governance Structures (2024)