Interview

Shawn Livermore: Jeff, thanks for joining me today. DeFi (Decentralized Finance) is shaking up the financial sector, and banks seem to be at a crossroads.

How do you see this playing out?

Jeff Sherwood: Thanks, Shawn. Yeah, DeFi is a real disruptor. Traditional banks are built on centralized control, and DeFi is the complete opposite—it’s decentralized, open, and removes intermediaries. Banks have spent centuries being the gatekeepers of financial transactions, and now they’re facing a model where smart contracts are replacing a lot of what they do. It’s a shift they can’t afford to ignore, but it’s also not one they can immediately embrace without restructuring how they operate.

What’s the main challenge they face in adopting or even integrating with DeFi?

Jeff Sherwood: It’s a mix of regulation, risk management, and infrastructure. Regulation is the big one. Banks operate in a heavily controlled environment—think Basel III, the Bank Secrecy Act, and AML (Anti-Money Laundering) compliance. DeFi, on the other hand, is borderless and largely unregulated. Banks can’t just jump into DeFi without running into serious compliance issues. And let’s be honest—banks don’t like giving up control.

A big concern is that DeFi is moving at an incredible pace, and banks struggle to keep up with the rapid innovation happening in smart contracts, liquidity pools, and automated lending platforms. They’re not used to working in an environment where governance is decentralized, and financial decisions are made programmatically.

So, are banks resisting DeFi altogether, or are they quietly experimenting with it behind the scenes?

Jeff Sherwood: A little of both. Publicly, most banks are cautious. But behind closed doors, a lot of financial institutions are either exploring how to integrate blockchain-based solutions or trying to understand how they’ll compete with DeFi in the long term. Some banks are launching their own blockchain projects or even partnering with fintech startups that are more agile in this space.

We’re also seeing banks explore tokenized assets—digitizing traditional financial products like bonds, real estate, or securities onto the blockchain. This is an area where banks could gain some leverage by offering hybrid solutions that maintain their regulatory advantage while providing DeFi-style accessibility.

We’ve seen major financial institutions getting into digital assets—Visa buying CryptoPunks, JPMorgan working with blockchain. Is that a sign of full adoption, or is it just them hedging their bets?

Jeff Sherwood: It’s hedging, mostly. Visa buying NFTs, for example, was more of a signal that they want to be part of the conversation rather than a full embrace of Web3. JPMorgan has been more aggressive with blockchain, launching their own JPM Coin for settlements. But for most banks, it’s a "wait and see" approach. They know DeFi is growing, but they need regulatory clarity before diving in fully.

If DeFi keeps growing and regulatory frameworks catch up, what happens to traditional banks?

Jeff Sherwood: They won’t disappear, but they will have to evolve. Banks still offer stability, security, and trust—things DeFi struggles with right now. But they’ll likely start adopting some DeFi principles, like offering tokenized assets, on-chain lending, and more automation in financial transactions. The real transformation will happen when traditional banks and DeFi find ways to coexist, with banks acting as bridges between regulated finance and decentralized networks.

What about the risks? DeFi has had a fair share of security vulnerabilities—rug pulls, smart contract exploits, flash loan attacks. How do banks view that?

Jeff Sherwood: That’s a huge concern. Banks are built on risk management, and DeFi—while innovative—is still prone to massive volatility and vulnerabilities. Smart contracts are only as good as the code they’re built on, and there’s no centralized authority to backstop losses when things go wrong.

We’ve seen billions lost due to smart contract hacks and security flaws. Banks can’t afford to take those risks without a safety net. This is where regulation might actually help DeFi—it could introduce the kind of guardrails that make institutions more comfortable stepping in. But until then, banks are watching and learning from DeFi’s failures just as much as its successes.

What should banks be doing today to prepare for a DeFi-driven future?

Jeff Sherwood: First, they need to invest in blockchain knowledge—understanding how smart contracts work, how decentralized protocols function, and where the risks are. Second, they should be working with regulators to shape how DeFi is integrated into the financial system. And finally, they should be looking at partnerships. Banks don’t have to reinvent the wheel; they can collaborate with existing DeFi platforms to provide hybrid solutions that meet regulatory requirements.

What’s the biggest misconception about DeFi that traditional banks need to get past?

Jeff Sherwood: That it’s all about speculation and crypto trading. Yes, DeFi has a lot of hype-driven projects, but at its core, it’s about efficiency and accessibility. It removes friction in financial transactions, reduces costs, and makes financial services available to more people globally. Banks that recognize that—and adapt—will have a strong position in the future of finance.

Shawn Livermore: Jeff, this has been insightful. Thanks for sharing your thoughts on how banks will handle DeFi.

Jeff Sherwood: Anytime, Shawn. It’s an exciting space, and we’ll see a lot of movement in the next few years.

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