TradFi Meets DeFi: Hybrid Finance and the Convergence of Traditional and Decentralized Finance

The lines between traditional finance (TradFi) and decentralized finance (DeFi) are rapidly dissolving. In 2025, regulatory clarity around digital assets – led by the U.S. GENIUS Act and the European Union’s MiCA regulation – has given banks and asset managers the confidence to integrate blockchain-based products and payment rails into their core operations. At the same time, on-chain cash instruments have exploded in scale: tokenized cash now approaches $300 billion in circulation, with stablecoins representing about $270 billion and tokenized treasury and money-market funds (MMFs) reaching $8 billion, a six-hundred-percent increase since 2024. Institutional networks like J.P. Morgan’s Kinexys and Onyx have processed more than $1.5 trillion in tokenized transactions, while tokenized MMFs are being pledged as collateral, accelerating settlement cycles and providing 24/7 liquidity. This whitepaper explores how TradFi and DeFi are converging, assesses the opportunities and risks of hybrid finance, and offers practical guidance for asset and wealth managers navigating the transition.

Introduction

For much of the past decade, traditional financial institutions regarded the world of cryptocurrencies and decentralized finance as a distant experiment. Banks questioned the legality of tokens, and regulators debated whether digital assets were securities or commodities. That debate is now largely settled. The Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act, signed into U.S. law on 18 July 2025, defines payment stablecoins issued by licensed entities as neither securities nor commodities, mandates 1-to-1 reserves in cash or Treasuries and tasks the Office of the Comptroller of the Currency (OCC) with supervising issuers. Europe’s Markets in Crypto-Assets (MiCA) regime, fully applicable since December 2024, similarly classifies stablecoins as e-money or asset-referenced tokens and requires issuers to hold appropriate reserves. These frameworks deliver the legal certainty that banks and asset managers need to adopt digital-asset rails.

Meanwhile, DeFi has matured far beyond its anarchic origins. Protocols provide automated market making, collateralized lending, and staking services around the clock. Institutions are increasingly tapping these tools—not to abandon regulation but to harness programmable settlement, fractionalization and instant reconciliation. The resulting model, often called hybrid finance, marries the trust, capital and governance of traditional finance with the efficiency, transparency and composability of decentralized finance. This paper examines how that convergence is unfolding, focusing on tokenized cash instruments, collateral networks, deposit tokens and the implications for investors.

The Rise of Tokenized Cash and On-Chain Liquidity: A multi-hundred-billion-dollar ecosystem

Tokenized cash – the representation of fiat money or money-market claims on a blockchain – has quietly become the beating heart of on-chain finance. According to a September 2025 market report, tokenized cash instruments hold nearly $300 billion in circulation.  Stablecoins dominate with roughly $270 billion outstanding, accounting for about 90 % of the market.  Tokenized treasuries and MMFs have surged to $8 billion, an 80 % increase since the beginning of the year, while the broader tokenized real-world asset (RWA) segment excluding stablecoins has expanded 600 % to roughly $28 billion. The sheer scale of these numbers shows that tokenization is no longer a pilot project; it is integral to institutional liquidity and payment operations.

Stablecoins – such as Tether’s USDT and Circle’s USDC – provide 24/7 payment rails outside traditional clearing systems. Average daily transaction volumes for USDT reach $20–25 billion, making stablecoins the largest blockchain-native payment network. In 2024, stablecoins processed about $32 trillion in transactions, equating to roughly 3 % of global cross-border payments. Analysts at McKinsey project that stablecoins could account for 20 % of cross-border flows within five years, implying more than $60 trillion in annual volume. These numbers underscore stablecoins’ growing role in payments, remittances and on-chain finance.

Tokenized money-market funds and collateral networks

While stablecoins dominate volume, tokenized MMFs and treasuries are where TradFi meets DeFi. BlackRock’s BUIDL fund remains the flagship product, with about $2.3 billion in assets across multiple blockchains. Franklin Templeton’s BENJI fund is the second largest. Goldman Sachs and BNY Mellon have integrated tokenized MMFs into their institutional liquidity platforms, signifying mainstream adoption.

The benefits are tangible. Treasury desks gain instant redemptions, dividends are paid automatically through smart contracts and liquidity is always accessible. Crucially, tokenized MMF shares can be pledged as collateral on lending platforms while continuing to accrue underlying yield. J.P. Morgan’s Onyxand Tokenized Collateral Network allow institutional clients to post tokenized MMF shares as collateral in repo transactions, enabling intraday liquidity without waiting for off-chain settlement. The Global Financial Markets Association (GFMA) notes that tokenized money-market funds have witnessed “substantial growth” as institutions use them to streamline liquidity management and collateral optimization. J.P. Morgan’s broader tokenization platform, K, has processed over $1.5 trillion in tokenized transactions, indicating that large banks are moving beyond proofs of concept to real, high-volume applications.

Deposit tokens: bank-issued digital money

In parallel with stablecoins and tokenized MMFs, deposit tokens have emerged as a bank-centric model for on-chain liquidity. Deposit tokens represent tokenized commercial bank deposits held at a regulated institution. Unlike stablecoins – which are typically issued by non-bank entities – deposit tokens are created by regulated banks and backed by insured deposits. The Capgemini report explains that deposit tokens are not a new asset class but a digital representation of traditional bank money, benefitting from FDIC insurance and subject to existing banking regulations. They are designed for tokenized finance ecosystems, enabling on-chain settlement with finality and compliance.

AMINA Bank’s research shows that deposit tokens are gaining traction. J.P. Morgan’s JPM Deposit Token (JPMD), built on Coinbase’s Base chain, is limited to institutional clients and combines regulatory oversight with real-time settlement. Citi has made tokenized deposits a strategic priority, and DBS Bank, working with Ant International, has created multi-currency Treasury Tokens capable of clearing more than 40 currencies instantly. The operational benefits are striking: cross-border transfers settle instantly without correspondent banks; liquidity management becomes continuous; and internal estimates suggest savings of around $150 million per year for every $100 billion in deposits. Compliance is automated via smart contracts that embed KYC and AML directly into settlement flows.These features enable banks to harness the programmability of digital assets while maintaining regulatory compliance and customer protection.

Regulatory Turning Point

Regulatory clarity is the catalyst that allows TradFi and DeFi to converge. The GENIUS Act—the first U.S. federal law on digital assets—clarifies that permitted stablecoin issuers must maintain 1:1 reserves and are regulated by the OCC, and that their products are neither securities nor commodities.In Europe, MiCA establishes separate categories for e-money tokens and asset-referenced tokens, imposes reserve requirements and caps daily transaction volumes for significant issuers. Asia-Pacific jurisdictions are also moving quickly: Singapore’s Project Guardian involves more than 40 institutions across seven jurisdictions, while Hong Kong’s Project Ensemble aims to make the city a hub for wholesale central-bank digital currency settlement. The mBridge project has processed HK$171 million in multi-currency transactions in under 30 seconds.Australia’s Project Acacia is testing tokenized fixed income, private credit, receivables and carbon credits under ASIC oversight.

These developments follow recommendations from industry bodies. The GFMA, Boston Consulting Group and Global Blockchain Business Council observe that distributed-ledger technology (DLT) can yield substantial operational efficiencies by reducing settlement times and increasing transparency throughout the trade lifecycle. Major financial institutions have moved from experimentation to large-scale implementation, with digital bond issuances by the European Investment Bank and tokenized MMFs demonstrating viability. Nevertheless, the same report stresses the importance of technology-neutral regulation and coordination across jurisdictions to avoid fragmentation. Regulators must focus on underlying financial activities and associated risks rather than on specific technologies.

Implications for Asset Managers

Instant settlement and improved liquidity

Asset managers can leverage hybrid finance to improve operational efficiency and expand distribution. Tokenized MMFs and deposit tokens allow managers to settle transactions within seconds rather than days, freeing up cash and reducing counterparty risk. Where traditional cross-border settlements can take three to five days, tokenized settlement has reduced that to under 30 seconds, while cutting transaction costs from around 6 % to 2–3 %. Managers can thus allocate cash more efficiently and lower the drag from uninvested balances.

Access to new collateral markets

Hybrid finance unlocks new collateral opportunities. Tokenized MMF shares and treasury tokens can be pledged in digital collateral networks such as J.P. Morgan’s Onyx, enabling funds to secure short-term financing or derivatives positions without moving assets off-chain. This improves capital efficiency and can lower the cost of leverage. It also expands the universe of eligible collateral, which historically has been limited to government bonds and cash.

Product innovation and distribution

Asset managers can build new products that combine regulated fund structures with on-chain settlement and fractional ownership. For example, a private-credit fund could issue deposit tokens representing investor shares, allowing investors to pledge those tokens as collateral or trade them peer-to-peer. Managers can design yield-bearing stablecoins or programmable treasuries that automatically reinvest coupons. Additionally, hybrid finance facilitates cross-border distribution via global-ISIN exchange-traded notes (ETNs) or tokenized feeder funds, eliminating the need for multiple local vehicles. The Q&A document provided by LYNK Markets explains that ETNs with a single global ISIN simplify cross-border distribution and reduce KYC/AML duplication, enabling managers to reach investors in multiple countries more efficiently.

Risk management and compliance

Hybrid finance also brings new risks. Smart contracts can have vulnerabilities; cyberattacks could compromise private keys; and regulatory obligations vary across jurisdictions. Asset managers must implement robust due-diligence processes on underlying protocols, custodians and service providers. They should engage with legal counsel to ensure compliance with evolving stablecoin and tokenization laws and invest in key-management solutions to safeguard client assets. Additionally, managers must monitor liquidity risk: while tokenized MMFs can be pledged as collateral, their secondary markets may still be thin, leading to potential discounts during stress. Effective risk management will separate innovators who succeed from those who stumble.

Implications for Wealth Managers

Enhanced client offerings

Wealth advisors can use hybrid finance to deliver institutional-grade solutions to a broader client base. Stablecoins and tokenized MMFs provide 24/7 access to cash management products, enabling clients to earn yield on idle balances and transact instantly across borders. Advisors can integrate tokenized assets into model portfolios, increasing diversification and offering exposure to private markets with lower minimums than traditional funds. For example, tokenized private-equity or real-estate feeder funds can reduce minimum investments from millions to tens of thousands of dollars, allowing mass-affluent clients to participate.

Operational efficiency and reporting

Digital assets generate real-time, immutable records, simplifying performance reporting and compliance. Smart contracts automatically distribute dividends and interest, reducing manual intervention and errors. Advisors can use dashboards to monitor positions, cash flows and collateral obligations across both traditional and digital assets. Combined with centralized KYC/AML frameworks, this automation reduces administrative burdens and speeds onboarding, letting advisors focus on client engagement and strategy.

Education and fiduciary duty

Wealth managers must educate clients on the benefits and risks of hybrid finance. Many investors conflate digital assets with speculative cryptocurrencies; advisors should clarify that stablecoins and tokenized funds are regulated instruments backed by real assets and subject to oversight. They should explain how on-chain settlement differs from trading on exchanges, highlight the importance of custody solutions and emphasize that tokenized shares may still carry redemption restrictions. Transparent disclosure of fees, liquidity windows and counterparty risks is essential to fulfilling fiduciary responsibilities.

Opportunities and Challenges Ahead

Hybrid finance is still in its early stages. The tokenized cash market is highly concentrated: BlackRock controls more than 30 % of tokenized MMFs, while Tether commands a 61 % share of the stablecoin market. Such concentration raises questions about systemic risk and market power. Regulatory divergence remains: the U.S., EU and Asia are developing frameworks at different speeds, and some jurisdictions may impose caps on stablecoin usage. As large banks roll out deposit tokens, they may compete directly with non-bank stablecoin issuers, potentially reshaping the digital-asset landscape. Finally, integrating legacy systems with blockchain networks is a complex technical challenge that requires standardization and investment.

Yet the momentum is undeniable. Cross-border settlement times have collapsed from days to seconds, cutting costs by more than half. Banks and asset managers are launching digital asset networks to streamline collateral management and liquidity. Regulatory clarity is improving, with frameworks like the GENIUS Act and MiCA establishing guardrails. As stablecoins and deposit tokens become ubiquitous, and as tokenized MMFs scale, the distinction between TradFi and DeFi will continue to blur. The future is not a replacement of one system by the other but a hybrid where programmable finance coexists with robust regulation and institutional trust.

Conclusion

The convergence of traditional and decentralized finance represents one of the most transformative shifts in capital markets since the advent of electronic trading. Tokenized cash instruments—stablecoins, tokenized MMFs and deposit tokens—are enabling instant settlement, perpetual liquidity and new collateral markets. Regulatory milestones such as the GENIUS Act and MiCA provide the legal certainty needed for mainstream adoption. Institutional networks like J.P. Morgan’s Kinexys have already processed trillions of dollars in tokenized transactions, demonstrating that hybrid finance is not a theoretical concept but an operational reality. Asset managers and wealth advisors who embrace this convergence early can gain a strategic advantage, offering clients faster, cheaper and more flexible access to global markets. Success, however, will depend on navigating regulatory complexity, ensuring technological robustness and maintaining the trust of investors. Hybrid finance is set to redefine capital markets—not by replacing the old but by enhancing it with programmable, borderless capabilities.

Key Takeaways

On-chain cash is big and growing fast: Tokenized cash instruments hold nearly $300 billion, with $270 billion in stablecoins and $8 billion in tokenized treasuries and MMFs. The tokenized RWA segment excluding stablecoins has grown 600 % year-over-year.

Stablecoins dominate digital payments: Stablecoins like USDT and USDC process $20–25 billion in transactions daily and handled around $32 trillion in 2024. Analysts project they could account for 20 % of cross-border payments within five years.

Tokenized MMFs unlock new collateral: Products such as BlackRock’s BUIDL and Franklin Templeton’s BENJI provide 24/7 liquidity, automatic dividends and the ability to pledge fund shares as collateral. J.P. Morgan’s Kinexys network has processed more than $1.5 trillion in tokenized transactions.

Deposit tokens blend bank trust and blockchain speed: Deposit tokens like J.P. Morgan’s JPMD settle cross-border transfers instantly, save institutions roughly $150 million per year for every $100 billion in deposits and embed KYC/AML into settlement flows.

Regulation and interoperability matter: The GENIUS Act, MiCA and Asia-Pacific pilots provide legal clarity, but coordination is needed to avoid fragmentation. Settlement times have dropped from days to seconds and costs from 6 % to 2–3 %, but success hinges on robust technology, standardized protocols and comprehensive investor education.

Technology as a Catalyst for Democratizing Private Markets – This paper examines how digital issuance platforms, tokenized feeder funds, electronic traded notes (ETNs) and smart contracts are lowering entry barriers and expanding access to alternative assets. It assesses the impact on emerging markets, showcases leading platforms, and outlines opportunities for managers seeking to scale.