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Future-Proofing Traditional Finance With Blockchain Technology

After his presentation on DeFi as a “conflict of interest-free” alternative financial system during Consensus 2023, Chainlink co-founder Sergey Nazarov joined State Street’s Global Head of Digital Asset and Technology Design, Nitin Gaur, for a fireside chat exploring how leading financial institutions are evolving through the integration of blockchain technology.

The conversation examined how approximately $471 trillion in existing financial markets could make its way on-chain in what Gaur called the shift from digitization to tokenization. “That is a massive shift, but it also solves a lot of problems that we’ve been talking about in the industry for quite some time,” he said. 

Nazarov explained how the deterministic model of blockchain-based systems alongside decentralized infrastructure such as oracles and smart contracts offers an opportunity to rethink the architecture of traditional finance so that the entire industry becomes more efficient and reliable. 

One of the biggest hurdles on the road toward realizing this vision is cross-chain interoperability – a problem Chainlink is actively working to solve through its forthcoming Cross-Chain Interoperability Protocol (CCIP).

From his experience working with asset and investment managers, Gaur deemed cross-chain interoperability an imperative and emphasized its urgency for asset servicing entities that need to be able to accept and manage tokenized assets across multiple chains.  

He highlighted the “herculean task” of ensuring the integrity of tokenized assets as they move between chains with siloed verification and validation systems. 

Nazarov explained how CCIP would establish a universal standard of cross-chain token movement and communications enabling banks and financial institutions to interact with any blockchain through their existing backend infrastructure. 

Gaur and Nazarov agreed that compatibility between old and new systems is mutually beneficial. Blockchain-based models offer traditional financial institutions the opportunity to future-proof their infrastructure while compatibility with existing infrastructure and messaging standards would allow blockchains to fully take hold in capital markets.

“I don’t think we’re going to be getting rid of the old messaging systems or the old backends,” Nazarov explained. The path forward, in his view, is through secure middleware that would allow existing systems to efficiently interface with multiple chains.

“By eliminating that friction, you get more of that $471 trillion into the system and then that rising tide floats all these boats,” he said.

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