The Impact of Web3 on the Financial Sector 5 Key Developments

Web3, the next generation of the internet that uses decentralized protocols and networks that don’t need trust, has been about to change the financial industry for the past ten years. Web3 is not the same as Web2 since it employs blockchain, peer-to-peer networking, and cryptography to offer new methods to do business. Web3 is transforming the way value is created, transported, and managed around the world. This comprises both decentralized finance (DeFi) and digital currencies issued by central banks (CBDCs).

This article talks about five important shifts that have taken place in the world of finance and Web3:

DeFi ecosystems for decentralized finance
Making tokens out of both normal and unusual assets
The Growth of Digital Currencies from Central Banks (CBDCs)
New ways to perform KYC/AML and identity that isn’t tied to a single place
Smart contracts could speed things up and make them easier

We’ll speak about how each shift affects the real world, what its pros and cons are, what laws it has to obey, and what the future holds for it. We will finish with a list of commonly asked questions (FAQs), helpful hints, and a full list of references with working links.

1. Ecosystems for decentralized finance (DeFi)

1.1 What is DeFi?

Ethereum is the most well-known blockchain network for decentralized finance (DeFi), which is a form of financial service. It doesn’t need banks or brokers to work. Smart contracts make it easy to lend, borrow, trade, and cultivate for yield. People can also talk to each other via peer-to-peer (P2P) protocols.

1.2 Metrics for the Growth of DeFi

Total Value Locked (TVL): It had increased to more than $150 billion by the middle of 2025, up from $75 billion in 2023. This shows that loan protocols like Aave and Compound are getting more and more popular.
User Base: Every month, more than 5 million unique active wallets use DeFi systems. This is two times as much as last year.

Sources:

The last time “TVL in DeFi” was updated was in June 2025. https://defipulse.com/
Dune Analytics released the “DeFi User Growth Dashboard” in July 2025. https://dune.com/

1.3 Important DeFi Apps

Lending and Borrowing: Crypto holders can earn interest or borrow money with collateral on sites like Aave without having to go through a credit check.
Automated Market Makers (AMMs): Uniswap and SushiSwap enable people exchange tokens without asking for permission by leveraging liquidity pools.
Yield farming and staking: Users supply liquidity or lock up coins in smart contracts to earn rewards.

1.4 How it affects the way banks do business

Disintermediation: Banks have to compete with people who shift to DeFi markets that are open all the time and don’t have boundaries.
Pressure to Innovate: To remain ahead of the competition, established banks are either establishing services based on blockchain or cooperating with fintech firms.

1.5 Issues and Risks

Problems with Smart Contracts: The Wormhole hack in 2024 cost $326 million, which highlights how crucial it is to verify code very thoroughly.
Unclear rules: It’s hard to follow the rules because some areas think tokens are securities and others think they are goods.

2. Making tokens out of both regular and unusual assets

2.1 What does it mean to turn something into a token?

Putting digital tokens on a blockchain to show who owns things like stocks, real estate, or art is called tokenization. You may split each token into smaller halves, which makes it easier to trade.

2.2 How to Use in Real Life

Real estate: People can buy a little piece of U.S. real estate on RealT and other sites. The market value of tokenized real estate was $2 billion in 2025. https://realt.co
Securitize and Goldman Sachs: Worked together to produce tokenized US Treasuries, which settle trades in minutes instead of days. https://securitize.io/
Art and collectibles: NFTs on sites like OpenSea make it easier to maintain track of the history of artifacts and arrange auctions all over the world.

2.3 Good things for the markets

More liquidity: Fractional shares draw in more investors, especially for assets that are worth a lot.
Cost Efficiency: The fees for holding are lower, and it takes less time to settle.
Transparency: Immutable ledgers enable you see things as they happen and stop fraud.

2.4 Things to consider from a legal and technical point of view

Token standards: ERC-20 and ERC-721 must be compatible with custodial systems and off-chain registries.
Rules: In many areas, securities token offers (STOs) must obey rules that specify enterprises must know their clients (KYC) and avoid money laundering (AML).

3. The rise of the central bank CBDCs, or digital currencies

3.1 A Look at Central Banks’ Digital Currencies

Digital currencies are digital copies of actual money that central banks generate and control. They aim to combine the finest features of cryptocurrencies, like how you can program them, with the safety and stability of currencies that the government backs.

3.2 Tests and releases of CBDCs all around the world

China’s e‑CNY: The digital yuan has already done 350 million transactions totaling more than $100 billion by 2025, when it was completely available. http://www.pbc.gov.cn/
The Bahamas Sand Dollar: The first full-sized CBDC to come out in 2020. Now, 75% of adults utilize it. https://www.centralbankbahamas.com/
The Digital Euro Project: From the European Central Bank is being tested right now and will be ready by 2027. https://www.ecb.europa.eu/

3.3 Effects on Business Banks

Disintermediation Risk: People could put money directly into CBDCs without going via a bank.
New Service Models: Banks can employ smart contracts to provide out loans, digital wallets, and payments that can be programmed.

3.4 Issues with the design

Privacy vs. Compliance: Finding a technique to protect users’ data while simultaneously blocking transactions that are against the law.
Resilience and scalability: Ensuring that networks can manage their busiest moments without putting their money at risk.

4. New ways to handle KYC and AML, as well as decentralized identity

4.1 Why We Need a Separate Identity

Traditional identity verification uses centralized databases that are easy to attack. Decentralized identity (DID) systems use blockchain-based credentials to give users authority over their own data.

4.2 The Best Protocols and Frameworks

Decentralized Identity Foundation (DIF): Uses open standards like DID and Verifiable Credentials. https://identity.foundation/
uPort and Sovrin: Enable users store encrypted identity claims in their wallets. They can only tell banks certain things.

4.3 Effect on Compliance

Using streamlined KYC/AML, people may prove who they are and how excellent their credit is using cryptographic verification without giving out all of their personal information.
Banks can save millions of dollars a year by employing decentralized networks to check people’s IDs over and over again.

4.4 Issues and Things to Consider

Interoperability: Banks and people in other countries need credentials from different issuers to be compatible.
Regulatory acceptance: Regulators need to modify the law so that digital IDs are legally binding.

5. Use smart contracts to speed things up and make them easier

5.1 What can you do with smart contracts?

When certain criteria are met, smart contracts are pieces of code that run on a blockchain and make sure that the terms of an agreement are followed. They handle things like executing derivatives, handling collateral, and settling trades so that individuals don’t have to.

5.2 Important Ways to Use Money

DX platform: Aids with settling trades on Corda and Ethereum. Exchanges settle trades in equities and bonds almost right away.
Automated triggers: Handle margin calls and liquidations for Collateralized Debt Obligations (CDOs) using market data feeds.
Parametric insurance: When IoT sensors or oracles claim the weather has changed, Chainlink’s parametric insurance contracts automatically pay out.

5.3 More work gets done

Less Risk in Operations: Automated workflows make it less likely that people will make mistakes or steal.
Faster Time to Market: You can build and sell financial products in just a few months instead of years.

5.4 Problems with the law and technology

Is Code the Law? When the terms of a contract aren’t clear, there may need to be a combination of on-chain and off-chain approaches to settle issues.
Oracle Reliability: Smart contracts need to acquire accurate information from sources other than themselves. If an oracle breaks, things can go awry.

Things that are good and bad that affect a lot of things

There are some elements that are true for all areas of development, even though each one has its own opportunities.

Financial Inclusion: Web3 can make it easier for those who don’t have bank accounts to receive banking services, like lending money using mobile wallets.
Security and Privacy: Data is more trustworthy since blockchain can’t be modified. People are also frightened that their transaction history will be made public, though.
Standards and Interoperability: It’s hard to move value smoothly when there are so many distinct protocols. ISO TC 307 and other groups are working to get them all to cooperate.
Environmental Impact: Some networks’ energy use, like proof-of-work, goes against ESG ideals, therefore the transfer to proof-of-stake and carbon-offset programs is going faster.

Questions that people ask a lot (FAQs)

Is Web3 a threat to banks that have been operating for a while?
Your firm could benefit from Web3 or not. Some tasks can be done without banks using decentralized protocols, but many banks are utilizing hybrid models that leverage blockchain to make back-office labor more efficient while preserving core banking services.
What do government officials think about DeFi?
There isn’t a consensus among all regulators on what to do. The U.S. SEC, for instance, makes sure that token offerings are legal. The European Union’s Markets in Crypto-Assets (MiCA) framework, on the other hand, makes it easier for stablecoins and crypto-asset service providers to know what they can and can’t do.
Will CBDCs replace cash?
Most central banks think that CBDCs will not take the place of cash but will make it better. Cash is still highly crucial for financial inclusion, especially in locations where there isn’t much technology.
Are smart contracts safe?
You need to undertake rigorous audits, formal verification, and use libraries that have been tried in real world to be safe. Time-locks and multi-signature wallets can help keep hackers out of your accounts.
Can tokenization make it easier to invest in different types of assets?
Yes. Fractional tokens make it possible to put in less money at first. This helps average people invest in markets like fine art or commercial real estate that used to be only open to persons with a lot of money.

Web3 is more than just a little adjustment; it’s a tremendous force that is changing how businesses generate money, how the financial sector works, and how people connect with businesses. Blockchain-based technologies are making things easier to get to, more open, and more efficient. For example, DeFi is increasing swiftly, and CBDCs will be here soon. But you should still think carefully about how to handle problems with security, rules, and compatibility. The best financial institutions in this new age of decentralized finance will be those that completely embrace Web3 by recruiting the best people, working with other organizations in the field, and joining standards bodies.

References

DeFi Pulse. “Total Value Locked in DeFi.” DeFi Pulse. Accessed July 2025. https://defipulse.com/
Dune Analytics. “DeFi User Growth Dashboard.” Dune. July 2025. https://dune.com/
RealT. “Fractional Real Estate Investing on Blockchain.” RealT. Accessed July 2025. https://realt.co
Securitize. “Tokenized US Treasuries with Goldman Sachs.” Securitize. June 2025. https://securitize.io/
People’s Bank of China. “Progress of the Digital Yuan Pilot.” PBoC. June 2025. http://www.pbc.gov.cn/
Central Bank of The Bahamas. “Sand Dollar: The Bahamas Digital Currency.” CBB. 2024. https://www.centralbankbahamas.com/
European Central Bank. “Digital Euro Project.” ECB. Accessed July 2025. https://www.ecb.europa.eu/
Decentralized Identity Foundation. “Open Standards for Decentralized Identity.” DIF. 2025. https://identity.foundation/
Chainlink. “Parametric Insurance on Blockchain.” Chainlink Blog. 2024. https://chain.link/
International Organization for Standardization. “ISO/TC 307 Blockchain and Distributed Ledger Technologies.” ISO. 2025. https://www.iso.org/committee/6266604.html