What is TradFi? A complete analysis of the differences between banks and DeFi, and how the GENIUS Act ushers in the era of integration

What is TradFi? The Three Key Differences with DeFi and CeFi

TradFi is a commonly used term in the blockchain and crypto ecosystem, used to compare with DeFi (Decentralized Finance) products and services that operate through smart contracts and blockchain technology. Understanding what TradFi is hinges on grasping its core differences from DeFi. TradFi is generally considered centralized, with higher barriers to entry, requiring users to create accounts with service providers and custody their assets. In contrast, DeFi offers decentralized services based on smart contracts, accessible to anyone with a crypto wallet and sufficient funds.

Asset ownership tracking mechanisms are another significant difference. TradFi’s asset ownership data is concentrated within a few institutions, with banks and securities firms maintaining client account records. DeFi uses distributed ledgers maintained by a broader community, creating more transparent and collaborative asset ownership tracking systems. This difference fundamentally affects transparency, auditability, and user control.

We can also compare TradFi with centralized finance (CeFi). CeFi offers many DeFi services but requires users to access these through centralized exchanges. In terms of how users access products, CeFi shares similarities with TradFi, as users must create accounts with service providers and custody their assets, just like in traditional banks or institutions.

Quick Comparison of the Three Major Systems: TradFi, DeFi, CeFi

TradFi (Traditional Finance): Bank-led, highly regulated, centralized custody, high entry barriers, long settlement times but high trust

DeFi (Decentralized Finance): Smart contract-driven, permissionless, user self-custody, real-time settlement but higher technical risks

CeFi (Centralized Finance): Crypto exchanges, combining DeFi services with TradFi custody models, user-friendly but with platform risks

This comparison reveals the essence of what TradFi is: a system relying on centralized entities to facilitate service access, ensure transaction settlement, and maintain regulatory trust. Retail banks, investment banks, and commercial banks are core components of this system. Central banks (such as the Federal Reserve, European Central Bank) manage monetary policy, control inflation, and stabilize the economy, while regulators (like the U.S. Securities and Exchange Commission SEC) ensure compliance, transparency, and investor protection.

The GENIUS Act Reshapes the Rules of the TradFi Game

The GENIUS Act (Guiding and Establishing the U.S. National Innovation Act for Stablecoins) is key to understanding how TradFi is evolving. The act first permits federally regulated banks and non-bank institutions to hold stablecoins on their balance sheets, connecting TradFi with blockchain-driven DeFi. This marks a turning point, providing the legal certainty and consumer protections that TradFi has long demanded.

Stablecoins are a unique type of crypto asset with extremely low volatility, maintained by pegging 1:1 to real-world assets like the US dollar or gold. Tether is currently the largest stablecoin issuer, with its USDT widely used across multiple blockchains. Stablecoins are available 24/7, enabling instant, low-fee cross-border transfers via various payment channels worldwide. While TradFi banks may take days to settle cross-border transfers, stablecoin settlements are recorded directly on the blockchain ledger, making them direct, transparent, fully auditable, and nearly instantaneous.

Several well-known TradFi institutions, including JPMorgan, Bank of America, Deutsche Bank, Goldman Sachs, Citibank, Barclays, and BNP Paribas, have entered the stablecoin space. Visa’s Global Growth Product Lead Rubail Virwadkar stated: “We believe that when stablecoins have credibility, scalability, and interoperability, they can fundamentally change the way global capital flows.” Endorsements from TradFi giants signal a fundamental shift in industry attitude.

As the first legislation of its kind, the GENIUS Act is attracting global attention. Regulatory agencies in the EU, UK, Singapore, and Hong Kong have issued statements clarifying their positions on stablecoins. The bill expands the U.S.’s regulatory influence internationally and consolidates the dollar’s position in the digital financial realm dominated by cross-border transactions. This means the definition of what TradFi is is expanding, no longer limited to traditional banking but beginning to integrate blockchain technology.

Challenges in the Technological Integration of TradFi and DeFi

TradFi companies aiming to issue stablecoins must support large-scale blockchain operations. Traditionally, TradFi employs centralized trading models, where a single institution stores and controls data. In contrast, DeFi uses decentralized blockchain databases, with data replicated across multiple nodes in a peer-to-peer network. Trust and control in DeFi are based on consensus mechanisms, with multiple “validators” approving transactions across the network. This enables fast, frictionless transactions but also involves higher computational overhead.

Banks using stablecoins need high-performance computing, high-speed storage, and low-latency connectivity to support enterprise-grade blockchain at scale. Each blockchain validator node controls access to the blockchain; to run nodes for transaction validation and synchronization, banks require powerful multi-core, high-frequency CPUs. Each node also needs high-speed, large-capacity storage to handle exponentially growing data. Since stablecoin transactions involve near-instant settlement, banks must establish low-latency, high-bandwidth network connections among their nodes, partners, and service providers.

Hosting data centers will play a critical role in this transformation. Data centers have already provided essential infrastructure for many TradFi institutions. Therefore, hosting data centers are ideal locations for deploying DeFi solutions. They offer the power redundancy, physical security, scalability, compliance support, and private high-speed network connectivity necessary for blockchain operations.

The Future Vision of Integrating TradFi and DeFi

Understanding what TradFi is should not remain stuck in past definitions but should look forward to its ongoing transformation. The future may involve combining TradFi’s compliance measures with DeFi’s innovation to create a balanced financial ecosystem that fosters trust and broad accessibility. Central banks (like the Federal Reserve) are exploring blockchain technology, and global interest in Central Bank Digital Currencies (CBDCs) is growing.

The GENIUS Act empowers TradFi institutions to conduct instant global transactions via blockchain, reshaping the future of finance. Other regions worldwide are taking note and may soon follow suit. Soon, the line between TradFi and DeFi will become blurred. Financial companies that can most effectively build and leverage this digital backbone will lead a comprehensive financial services ecosystem formed by the fusion of TradFi and DeFi.