US banks are opening to crypto

In this post, we’re looking at what this could mean for DeFi and decentralized exchanges.

In late April, in a significant policy shift, the US Federal Reserve withdrew its 2022 guidance that had discouraged banks from engaging with cryptocurrencies.

This decision marks a major turning point for the traditional finance industry, as it effectively clears the way for US banks to offer crypto-related services. Banks in other countries that have so far been hostile to crypto are also likely to view the Federal Reserve’s decision as a positive signal.

For the crypto sector, which has long sought deeper ties to traditional finance, this move could be transformative, with major implications for the future of decentralized finance and decentralized exchanges (DEXes).

Barriers removed

The withdrawn guidance, originally put in place during a period of heightened regulatory skepticism, had created significant barriers for banks looking to enter the crypto space. Its removal signals a friendlier legislative environment and reflects a growing acknowledgment of the maturing digital asset market. With this new development, US banks are now positioned to provide custody, trading, and other crypto-related services without facing the same regulatory roadblocks.

This shift is likely to accelerate institutional adoption of cryptocurrencies. By making it easier for large financial institutions to offer crypto services, the move could lead to increased liquidity, broader acceptance and heightened legitimacy for the entire asset class. Traditional banks engaging with crypto will help bridge the gap between decentralized finance and mainstream finance, bringing new capital and users into the ecosystem.

A double-edged sword?

However, for DeFi platforms and DEXes like 1inch, this development could be a mixed blessing. On one hand, broader adoption of cryptocurrencies by traditional financial institutions could benefit DeFi by expanding the overall crypto user base. New users, once introduced to crypto assets through their banks, may eventually seek out decentralized alternatives that offer greater control, transparency and opportunities for yield.

On the other hand, the entry of large banks into the crypto space introduces new competition. Centralized institutions, with their brand recognition, regulatory compliance and customer trust, could siphon users away from DeFi platforms if they manage to offer convenient and cost-effective crypto services. While DeFi remains attractive for its permissionless nature and user empowerment, banks could appeal to a segment of users who prioritize simplicity and regulatory assurances.

DeFi projects: differentiation is key 

As traditional finance moves in, DeFi needs to continue to emphasize its core strengths: decentralization, transparency, censorship resistance and innovative financial products that cannot easily be replicated in traditional systems. Features like self-custody, algorithmic governance and open composability remain powerful advantages for DeFi platforms that centralized competitors cannot fully match.

Additionally, DeFi will need to improve user experience. One reason banks might succeed in attracting crypto users is their seamless onboarding and familiar interfaces. By continuing to enhance UI/UX, DeFi platforms can lower entry barriers and appeal to a broader audience.

Ultimately, the Federal Reserve's move is set to open a new chapter for the crypto industry. Traditional banks will become more active players in the space, but DeFi has the opportunity to thrive by staying true to its foundational principles while adapting to an increasingly competitive environment. For decentralized exchanges like 1inch, this is a moment to reaffirm the value of decentralization and continue innovating to meet the needs of a rapidly evolving market.

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