a16z Crypto says traditional finance is unlikely to adopt DeFi as a whole or evolve into a neat hybrid that fully combines the strengths of both systems. Its argument is simpler: if blockchain improves an existing financial business, institutions will use it. The draw is not decentralization as an ideology. It is lower costs, better settlement, wider distribution, and tighter control over customer relationships.
That means institutions are not merging with DeFi, according to the piece. They are taking the parts that fit their operating constraints and dropping the parts that do not. What emerges from that process will look like neither legacy finance nor today’s DeFi in its current form. a16z describes the result as a new category built on blockchain rails but optimized for institutional constraints: programmable financial infrastructure.
Institutional adoption is driven by cost, risk, and control
The article says this dynamic could shift as regulatory frameworks mature. It points to legislation such as the CLARITY Act, which could eventually make it easier for institutions to access permissionless systems directly. Even so, a legal opening would not instantly reset the risk posture of traditional finance. Institutions still adopt technology through the lens of cost, risk, control, and operational fit.
From that starting point, a16z outlines two opportunities. The first is helping institutions adopt the infrastructure they are already prepared to use. Every primitive institutions take on, from atomic settlement to programmable money to tokenized collateral, helps validate the technology, build shared rails, and bring real transaction volume and capital on-chain.
The second is continuing to build open, crypto-native financial systems that institutions are not yet ready to use. a16z does not frame these as competing bets. It says they can and should exist in parallel. If both develop successfully, convergence can happen naturally, not because one system fully replaces the other, but because both increasingly rely on the same underlying infrastructure.
Which DeFi primitives institutions are willing to keep
In a16z’s view, a financial institution adopts a primitive only when it clears two tests at the same time. It must improve cost, risk, or distribution, and it must stay compatible with control and accountability. The primitives institutions reject, including open access, pseudonymity, and immutable execution, may pass the first test but fail the second.
The piece turns that into a design rule for builders: if a feature only creates value by removing institutional control, it will most likely be reshaped or rejected, no matter how elegant it looks.
a16z gives several examples of primitives that are easier for institutions to absorb. Atomic settlement narrows the gap between trade execution and finality, cuts counterparty risk, and frees collateral tied up against unsettled trades. Shared ledgers remove one of the largest hidden costs in financial back offices by making reconciliation unnecessary. Programmable money allows coupon payments, margin calls, and corporate actions to run as code instead of through chains of manual instructions.
The article also says AMM curve mathematics, stripped of the permissionless wrapper around it, is reappearing as a pricing engine for on-chain foreign exchange and tokenized money market net asset values. In each case, the benefit is tied to the profit-and-loss statement or the removal of a specific operational risk and its associated cost. None of those benefits require institutions to buy into decentralization itself.
What JPMorgan, BlackRock, and Franklin Templeton illustrate
a16z says this is the right way to read JPMorgan’s permissioned blockchain deposits for institutions, as well as tokenized money market funds from BlackRock and Franklin Templeton. These are not corporations tentatively stepping into DeFi, the piece argues. They are using blockchain to do what they already do: settle interbank payments, manage fund subscriptions, and distribute yield-bearing instruments, only with better pipes underneath.
Those deployments keep blockchain traits such as programmability, transparency, and atomic settlement. At the same time, they intentionally discard the features that make native DeFi work, namely open access, pseudonymity, and trustless execution. a16z says that is not a failure or a compromise. It is a deliberate architectural choice, and one that says a great deal about where this market is heading.
Institutional buyers do not evaluate technology like crypto-native users
The article argues that it is a mistake to treat institutional adoption as a larger distribution channel for existing DeFi infrastructure. Institutions do not evaluate protocols the way crypto-native users do. They look at software vendors, infrastructure partners, operational risk, compliance controls, and long-term ownership of critical systems.
That is why success in DeFi does not automatically translate into success with institutions. Enterprises rarely buy the “best” technology in the abstract. They buy technology that fits their current workflows, risk models, and procurement processes.
a16z places blockchain in a familiar historical pattern. Any technology that enters a heavily regulated, risk-managed, liability-conscious environment gets reshaped by that environment. The internet produced enterprise firewalls and private intranets. Cloud computing produced private clouds, VPCs, and FedRAMP. AI is now being adapted through on-premises deployments, data residency rules, and model governance. Blockchain, the article says, will follow the same path.
Reconfiguration happens along compliance and enterprise value
a16z says this reconfiguration runs along two main axes.
The first is compliance. KYC, AML, sanctions screening, investor accreditation, and regulatory reporting are non-negotiable for most institutions. Permissionless systems are not natively built for those requirements. Institutions need the ability to freeze assets, reverse transactions, and identify counterparties. Because DeFi was not originally designed around those needs, adapting it usually requires meaningful architectural changes. The article adds that this may evolve over time. CLARITY could make it easier for institutions to access permissionless systems while still meeting regulatory obligations. For now, though, most institutions still assess blockchain infrastructure through the lens of control, accountability, and operational risk.
The second axis is enterprise value delivery, which the article says is often underestimated. Institutions do not adopt blockchain because they believe permissionlessness is a principle worth defending. They adopt it because it can compress costs, reduce reconciliation friction, create new distribution channels, or help them embed themselves more deeply in customer relationships. If the value proposition cannot be explained in those terms, it is unlikely to survive procurement.
Stablecoins, Circle Arc, and SWIFT point to the same pattern
a16z describes stablecoins as one of the clearest examples. Banks, payment providers, and fintech companies increasingly see them as useful settlement infrastructure because they allow dollars to move faster across networks and geographies. That does not mean they are embracing the broader philosophy of permissionless finance. They are adopting programmable dollars because they are useful.
The article then points to Circle’s evolution and says Arc is a fitting example of how blockchain infrastructure is being packaged for institutional buyers. The emphasis shifts to compliance, operational control, trusted counterparties, and integration into existing workflows, rather than permissionless access and composability. The pitch is not permissionlessness for its own sake. It is faster settlement, global reach, and better capital efficiency delivered in a form institutions can actually use.
Even SWIFT, according to the article, is increasingly framing blockchain in a similar way. Its work on tokenized asset interoperability is not an effort to replace existing financial institutions. It is an attempt to improve how those institutions coordinate with one another over the SWIFT network. The pattern keeps repeating: blockchain adoption is reinforcing established financial networks rather than displacing them.
Two opportunities for builders, but not one blended company strategy
a16z says it would be a mistake at the industry level to abandon one opportunity in favor of the other. At the company level, though, it would also be a mistake for most teams to try to pursue both at once.
Institutional adoption and open networks can reinforce one another across the ecosystem, but they are still fundamentally different businesses for most teams. Building for institutions means understanding procurement, compliance, control, channel partners, and long sales cycles. Building for open networks means optimizing for developers, liquidity, composability, and network effects. The customer base, distribution model, product requirements, and success metrics often diverge completely.
That does not make one path superior. It means founders need to be explicit about which market they serve and recognize what connects the two beneath the surface: public blockchains as neutral settlement rails.
The article says working with institutions and building an adjacent financial system are not contradictory goals. Done properly, each side strengthens the other. Permissioned layers bring volume, legitimacy, and capital. Open layers keep producing the primitives that permissioned systems later adopt. When convergence comes, it happens on the rails, not through one system surrendering to the other.
How to build programmable financial infrastructure
a16z sketches out two approaches for this new category: build from scratch, or adapt an existing product.
It cites networks such as Canton as examples of the first approach. These systems are not adjusted versions of existing DeFi infrastructure. They are designed specifically around institutional demands for privacy, compliance, and controlled interoperability. The goal is not to pull banks into DeFi. It is to use blockchain-based coordination while preserving the governance, confidentiality, and operational control institutions require.
The second path is to adapt crypto-native infrastructure that already exists. Here, the article points to Morpho. Rather than abandoning its DeFi primitives, Morpho has focused on making them easier for institutions and asset issuers to use. a16z gives the example of Apollo’s ACRED fund, which uses Morpho as part of its on-chain lending strategy and pairs DeFi-native lending primitives with institutional-grade distribution, compliance, and fund structure. The result is neither pure DeFi nor a fully isolated institutional stack. It is a model in which an institution selectively adopts existing crypto infrastructure and packages it in a way that meets its own requirements around control, compliance, and distribution.
The article cautions against treating those examples as a default playbook. Institutions are a distinct customer segment with distinct requirements. In many cases, building for those requirements from day one may prove more effective than modifying products originally designed for open networks.
Open networks remain the main source of innovation
a16z closes by arguing that many of the innovations institutions are adopting today did not originate inside banks, asset managers, or incumbent financial infrastructure. They emerged from open networks, where builders could freely experiment with new market structures, coordination mechanisms, and financial primitives.
That distinction matters, the article says, because institutions are not the main source of innovation in this industry. Permissioned layers usually sit downstream from open ones. If the sector becomes too focused on selling to banks and asset managers, it risks mistaking one large buyer category for the entire opportunity. Traditional finance is an important customer, but it is not the only one.
a16z’s conclusion is that designing for institutional requirements is legitimate and valuable, but it is only one lane rather than the whole road. If a team is building for institutions, it should fully embrace that mission instead of assuming crypto-native appeal will automatically convert into enterprise adoption. If a team is building for open networks, it should keep going rather than abandoning its direction just because institutions are the loudest buyers in the market today.
The piece ends with a direct claim: traditional finance is not adopting DeFi. It is selectively adopting the parts that fit its model. For builders, the real opportunity is not to chase every market at once, but to understand which market they are building for and execute accordingly. The future may run on institutional infrastructure, a16z says, but many of its most important innovations will continue to emerge from open networks.