a16z Crypto partner: Crypto is being repackaged by financial institutions, and its potential will far exceed expectations

Author: Guy Wuollet

Compiled by: Jiahua, ChainCatcher

As someone who considers themselves part of the "crypto circle," I have always been puzzled: why do Wall Street and an increasing number of Washington politicians insist on using the term "digital assets"?

The assets I deal with daily are almost all digital.

I can't even remember the last time I went out with cash. From bank accounts to brokerage accounts, all personal finances are online. I rarely even take out physical credit cards. After discussing with peers, I found that I am not alone.

Most people in developed countries have very few truly non-digital assets left, mainly physical items like houses and cars. These are referred to as "real assets," but this term can be more confusing, as it implies that stocks, bonds, digital tokens, and derivatives are, to some extent, not "real."

But they are certainly real.

However, after years of investing and building systems in the fintech field, I realized one thing: most areas of finance are not as digitalized as we think.

Most other industries in the economy, from media and retail to logistics, have been completely restructured around software. Finance seems similar to them, but the underlying systems have hardly changed— the wave of digitalization brought by mobile internet and cloud computing has largely bypassed the financial industry.

This is finally starting to change.

The Coordination Dilemma in the Financial Industry

Financial institutions are still stuck in the past in many ways.

They operate on a bunch of fragmented systems, relying on paperwork and repeated reconciliations to maintain operations. Just figuring out "who holds what," "when to settle," "how to sort transactions," and "which rules apply" takes a significant amount of time.

In theory, a shared database could solve the problem. But in practice, more challenging issues immediately arise: who controls this database? Who has the authority to modify it? What if the participants do not trust each other?

This is why blockchain is becoming popular in areas that seem completely different from the early crypto circle.

Crypto culture initially revolved around concepts like "decentralization" and "financial sovereignty," which are still important today. However, what is pushing large financial institutions toward this technology is not ideology, but rather more practical coordination issues.

Wall Street's logic has always been more pragmatic than ideological.

The sensitivity of each trading firm to counterparty default risk is similar to that of each startup to platform risk (for example, a project built on Facebook could be kicked off at any time).

Counterparty risk needs to be managed, censorship resistance needs to be managed, fair ordering and best execution also need to be managed. Wall Street may not call these "decentralization," but what it aims to solve is essentially the same issue.

In my view, blockchain is the first to provide a decent answer to these old problems.

It offers a neutral system that allows multiple parties to coordinate without handing control over to a single owner. The ownership of assets is directly written into the software, eliminating the need for a separate ledger to reconcile, and there is no external record to adjudicate who owns what.

The assets themselves are the record.

This is the real reason Wall Street is beginning to seriously embrace blockchain: not because they suddenly believe in decentralization, but because blockchain provides a common "default option" among multiple counterparties, allowing everyone to upgrade their backend systems.

This is what the term "digital assets" truly aims to express— it represents the digital transformation of financial services, just as cloud services represented the digital transformation of large enterprises years ago.

What Moving On-Chain Means

As the crypto industry moves toward Wall Street, it is also shedding some of its rebellious nature, entering a world of collared shirts, compliance reviews, and various compromises.

However, while Wall Street uses blockchain for digital transformation, it has unknowingly inherited the strongest capability from the crypto space— a capability that the software industry has had for decades: composability.

When financial assets operate on shared, programmable infrastructure, they can be composed, extended, and integrated without starting from scratch each time.

Some benefits are obvious, such as faster settlement and lower costs. But the deeper change is structural: building applications on top of this system will become much easier.

In other words, once crypto technology enters financial institutions, it will not disappear; it will simply be repackaged.

This movement is becoming infrastructure. And when Wall Street starts using this infrastructure, the crypto spirit it ultimately inherits may be much more than it originally anticipated.