Why it might be time to ditch ‘TradFi’

Words may lose their precise meaning or their emotional force through overuse.

A catalyst is defined as a substance that accelerates a chemical reaction but remains unaltered in the process. The word has come to mean simply an agent for change.

The original meaning of awesome was: likely to inspire profound respect or reverential fear. Enough said.

The expression TradFi occurs so frequently in crypto reporting, we may ask whether it has outlived whatever usefulness it might have had. A contraction of “traditional finance,” it stands in opposition to the crypto industry in general, but it has no precise meaning.

Traditional finance systems — note the deliberate plural — include banks, stock markets, bond markets, building societies, and insurance companies.

Such institutions have one thing in common: They are heavily regulated by agencies that are set up by governments and require strict compliance with their rules.

Financial institutions differ in the way they are structured, however, and in their modes of operation.

In “Liar’s Poker,” a 1989 autobiographical account of working in Wall Street, Michael Lewis noted the cultural divide between people who work in bond markets and those in equities. And that’s putting it politely.

The vast influx of liquidity, along with regulatory alignment and an aura of legitimacy that finance giants would bring to crypto might come at a cost.

There are differences between financial systems too. Unlike stock markets in North America and Europe, those in China are almost closed to foreign investors. What’s more, the Hong Kong exchange operates under different rules from those in Shanghai, Shenzhen and the new Beijing market, where only certain types of shares are accessible to foreign investors.

Even the colours indicating profit and loss are not the same as in other countries. In China, red means a share has gone up, green — that its value has dropped.

In Islamic countries, a religious ban on usury obliges banks to extend credit under different rules from those in other parts of the world.

NOW READ: Anyone involved in DeFi would be scrutinised under sweeping policy proposal

The expression TradFi, therefore, is no more precise than “non-vegetarian,” which encompasses hamburgers, boeuf bourguignon and Australian bush tucker, as well as foods prepared according to religious rules of halal and kosher.

The word was once apt, as many in the early days of crypto saw themselves as outsiders, and not a part of the global financial system.

While pragmatists welcome moves by international investment firms such as BlackRock into the crypto market, some others may fear such moves will contaminate the purist ethos of crypto.

The vast influx of liquidity, along with regulatory alignment and an aura of legitimacy that finance giants would bring to crypto might come at a cost. The price would be a weakening of crypto’s core values of anonymity, self-custody, and resistance to censorship.

But the borders appear to be becoming blurred.

As DL News’ DeFi correspondent Tim Craig reported last week, crypto markets are no longer immune to pressure from bond markets.

NOW READ: Lure of Treasuries behind Circle stablecoin’s $29bn slump — and USDC could fall even further

The supply of Circle’s USDC stablecoin has plunged by more than $29 billion from a peak of about $55 billion in June last year. Analysts quoted by Tim attributed the 41% drop partly to the higher yields now offered by US government bonds.

Most large US and European crypto investors prefer Circle’s USDC to other stablecoins because they see it as trustworthy, transparent, and compliant with regulations.

The need for compliance may also erode the barriers which some in crypto would like to maintain.

The European Union’s Markets in Crypto Assets regulation, or MiCA — designed to protect investors and ensure financial stability — will come into effect next year.

Its provisions include transparency, disclosure, oversight of transactions, and the regulation of public crypto offers.

The UK, which has the largest financial market in Europe, left the EU in January 2020, but its government is considering bringing in legislation with similar aims.

NOW READ: Pact loses main dev, who says Algorand projects ‘uninvestable’

National laws enacted to bring EU member states into line with MiCA will be complex, with different provisions applying to various parts of the financial system. Whatever regulations the US decides to bring in will no doubt be as daunting.

In such circumstances, the very concept of traditional finance may need some readjustment.

None of this should be taken as a call for an editorial edict to ban the term TradFi.

It is, rather, a recommendation that reporters and editors think carefully about what they mean when tempted to use it, and to find other ways of expressing their thoughts.

What do readers think? Is TradFi a useful expression? Or should journalists drop it? If you have an opinion, write to Robert Holloway, DL News’ ombudsman, at: robert@dlnews.com