Institutions Want Traditional Finance Clarity, Not Complex DeFi, for Bitcoin-Backed Lending

Bitcoin-backed lending needs to adopt structures familiar to traditional finance to win broader institutional adoption, CoinDesk reported on May 7.

Industry executives at Consensus 2026 in Miami said institutional investors favor lending and custody arrangements with clear transparency and risk controls over DeFi products.

Alexander Blum, chief executive officer of Two Prime, said standardization and risk management matter more than experimental DeFi structures at this stage of institutional lending growth. What institutions want, he said, is a structure that keeps assets safe rather than a complex explanation of how the system works.

That preference reflects the industry's experience in 2022, when crypto lenders including Celsius, Voyager and BlockFi filed for bankruptcy as the market turned down. Excessive leverage, rehypothecation and opaque risk management were cited as major causes.

Panelists said a wide gap remains between institutional investors and the crypto industry in how they assess risk. Adam Reeds, chief executive officer of Ledn, said the most important issue is where the Bitcoin is held. Jay Patel, chief executive officer of Lygos Finance, added that borrowers should thoroughly evaluate a lender before taking out a loan, with rehypothecation the most critical factor to examine.

Blum said the traditional financial system is built so that someone can be held accountable when problems arise. Institutions still prefer intermediaries with clear legal liability and standardized procedures, he said.