How Indian Fintech startups are pioneering fusion of conventional and decentralized finance

By Mr. Rohit Arora, Co-Founder and CEO, Biz2X and Biz2Credit

Drivers of Convergence: Let us welcome the era of Hybrid Finance 

While the world gears up to decentralized finance, India has a potential tool in Hybrid Finance. And its scope is not just limited to conventional finance that we witness every day, but across digital payments, lending, Insurtech, regtech, and even blockchain.

Traditional-finance has already witnessed transactional-volume and reliability besides emergence of various financial products and innovation from systems such as Aadhaar, UPI, Digi Locker, and account aggregators – offering authenticated, real-time data exchange.

Decentralized finance is an altogether different ball-game and a huge advantage. And, India has the necessary ingredients – systems, protocols, startups who drive innovation, and entities that follow processes to the T.

SMART-STARTUPS BRIDGING BIG OPPORTUNITY

Unlike traditional banking, decentralized finance (DeFi) is a gold-mine worth nearly a trillion dollars in valuation by 2032. According to the Global Crypto Adoption Index, with DeFi, India has already surpassed 154 countries in terms of adoption – as of 2024, as many as 17.6% of Indian crypto investments were parked in DeFi utility tokens.

There is a tall opportunity in remittances, which could be a $130 bn opportunity. Remittances, today are routed through multiple intermediaries – banks, SWIFT networks, and forex agents, which adds cost and time. A stablecoin-backed remittance system bypasses this by using blockchain rails. Settlements are near-instant. Plus, transparency is baked in and regulatory compliance can also be embedded through smart contracts enforcing KYC norms.

Blockchain is socially relevant. For example, recently the Mann Deshi foundation leveraged blockchain to connect thousands of women across India to support micro-loans. The institution has connected nearly half a million women with micro-loans. Hence, blockchain can be used in social-lending contexts.

While the blockchain technology may appear complex, Indian startups have enabled several business cases. For instance, traditional mutual funds and real estate investment trusts (REITs) were often perceived as complex, slow, and high-cost. Fintech startups have experimented with tokenized funds – fractional investments. These can now be represented as digital tokens and traded on peer-to-peer networks. This DeFi adoption has increased liquidity and reduced entry barriers.

In decentralized lending, Indian fintechs are overlaying DeFi protocols with real-world credit scores sourced from bureaus like CIBIL or CRIF. This lets users borrow using verified reputations, not just crypto collateral. The result: lower interest rates, reduced fraud, and better credit allocation. Even insurance is seeing a decentralized movement where parametric insurance models – which pays out automatically when certain conditions are met (such as rainfall below a certain level) – are being tested by agri-fintechs using blockchain and DeFi protocols. This blends traditional underwriting with decentralized execution, reducing claim disputes and processing times.

INDIA’S BIG ADVANTAGE

Some of the ingredients necessary to a digital infrastructure setup are already available to India. Thanks to higher digital adoption rates by banks and the payment systems, our digital public infrastructure is second to none. Even regulators such as the Reserve Bank of India and SEBI (Securities and Exchange Board of India) have launched independent yet controlled regulatory sandboxes.

Such test beds allow innovation without the threat of immediate penalties. Add to these factors, India’s rich talent pool of startups, and trained personnel in Web3 protocols, Solidity, and decentralized architecture have won laurels with DeFi credit trials across the world. These are not just proofs of concept. They are live pilots with regulatory oversight and market potential.

BUILDING REAL IMPACT

But constructing innovation isn’t easy, especially when it straddles two different worlds of conventional and new-age finance. Since India has not yet defined the clear legal framework for digital assets, scaling sandboxes into public products could remain a grey area. Also, startups need to ensure that tokenized instruments don’t violate securities laws. They must also comply with anti-money laundering (AML) and data privacy rules.

Building impact cannot come at the cost of user rights and awareness. Most retail users are unfamiliar with private keys, wallets, and on-chain risk. Even tech-savvy individuals can be scammed by phishing or rug pulls. Fintechs need to design interfaces that abstract the complexity while building in guardrails. Additionally, Blockchain-based DeFi can introduce new risks such as smart-contract bugs, bridge-exploits, and even manipulation that can cause huge losses. Since there is no central authority to reverse the transaction, fintechs need to adopt rigorous audit protocols and real-time monitoring. Some are now integrating AI-based risk engines to flag suspicious behaviour before damage occurs.

Finally, there should not be second thoughts on interoperability and trust. Traditional financial systems run on centralized databases. DeFi runs on distributed ledgers. Getting these two systems to talk requires middleware layers, cryptographic APIs, and legal agreements. This is expensive and time-consuming. Hence, banks and regulators remain sceptical of decentralized models, which may be won by showcasing transparency and a clear value proposition.

Traditional finance, rooted in centralized databases, must now co-exist with innovations like DeFi, digital lending, Insurtech, regtech, and blockchain. All of which demand robust APIs, middleware, and shared standards. India’s digital rails, regulatory sandboxes, and skilled tech ecosystem offer a unique foundation to engineer this convergence. As regulatory clarity and user protections evolve in parallel, the fusion of legacy systems with decentralized models could shape a resilient, transparent, and inclusive financial architecture for the future.