The Changing Face of Digital Assets

June 8, 2020

In the decade since digital assets emerged, the asset class has undergone a wholescale evolution and is now primed for material institutional engagement.

The digital asset industry now carries a total market capitalization of $253B[1], and as the market continues to mature, with more robust and regulatory compliant infrastructure, institutional investor interest has been growing. Industry research indicates that interest in cryptocurrency trading by institutional investors is significant with nearly half (47% of survey participants) interested in digital assets as an investment.[2]

Digital assets in times of uncertainty

These findings could not be more germane than at the present moment, when macroeconomic uncertainty has necessitated record levels of quantitative easing across the world, testing investor confidence in the central bank and currency system. In this environment, capital preservation is king for investors seeking new ways to allocate within their portfolios. Indeed, after an initial plunge at the outset of global COVID-19 shocks, bitcoin (BTC) has stabilized and has been following trading patterns much like a store-of-value asset, signaling investor confidence in its ability to weather the storm.

Investor attitudes are changing

In the early years of digital asset trading, BTC was one of the first digital currencies and often associated with price collapses and low industry transparency, which challenged the reputation of digital assets. Negative perceptions were compounded by hacking, theft and fund misappropriation scandals, such as those which plagued the Mt. Gox exchange as a result of poor governance and insufficient regulation.

Attitudes are changing however, a State Street study showed that 38% of their clients intended to increase their allocation of digital assets in 2020 and that 45% say the tokenization of traditional assets will be a massive disruption to the market within the next five years.[3] Furthermore, a 2019 McKinsey report[4] purports that this early skepticism around digital assets and by association, distributed ledger technology, has likely prevented banks from saving as much as $14 billion a year through the application of blockchain to address issues such as cross-border payments, client on-boarding and fraud detection.

Improved regulatory oversight and infrastructure

The digital asset industry has come a long way from its early days. Several infrastructural improvements, such as the introduction of custody solutions and multi-signature wallets, have enhanced confidence and trust in the secure handling and safeguarding of digital asset investments.

Most importantly, the past two years have brought much regulatory clarity and standards unification, with regulators in major jurisdictions providing guidance on how they view the asset class. International task forces have also issued sensible conduct and oversight recommendations. For example, The Financial Action Task Force’s (FATF) Recommendations for Virtual Assets and Virtual Asset Service Providers, which included the so-called ‘travel rule’ requirements and the 5th Anti-Money Laundering Directive (5AMLD 2018) both of which have further legitimized the asset class and have been pivotal in shifting attitudes.

Growing institutional participation in digital assets

Institutional participants require heightened security standards underpinned by a regulatory compliant ecosystem of solutions, in order to fulfil their fiduciary responsibilities. Regulation has been catching up and infrastructural advancements now enable institutional players to partake in digital investing.

The expansion of hedging capabilities has represented a key maturation step for the digital asset class. So too have order routing systems with API connectivity, which allow institutions to aggregate order books and manage high volumes of orders. Digital currency exchanges are now expanding their offering to include trading instruments to accommodate various portfolio strategies. For familiarity and consistency, these systems can also be connected to institutional-grade custodial solutions that provide auditable and secure storage of the assets.

Mainstream adoption presents new opportunities

Many important ecosystem developments over the past two years have paved the way for digital assets to realize mainstream financial services proliferation — the professionalization of protocols in new exchanges to ensure utmost diligence around permission settings, operational controls, as well as reporting, have been a welcome development.

In the past few years, we have also witnessed a global and historical shift by central banks into digital currency exploitation. The Bank for International Settlements found that 80% of central banks are engaged in some form of central bank digital currency (CBDC) work, with 10% expecting to issue their own within three years. Indeed, chatter around the People’s Bank of China currency has been dominating the financial media over the past year, as have developments around Facebook’s Libra.

Many commentators concede that substantive institutional demand is already here, but that it is frustrated by a scarcity of compliant products that satisfy institutional standards. That being said, options for institutional exposure have continued to grow, particularly so in recent years. The development of bitcoin ETF’s, over-the-counter bitcoin trusts and a derivatives market have been pivotal catalysts for digital asset adoption and are considered a sign of integration into mainstream markets.

Digital assets in the next decade

In the decade since digital assets emerged, the asset class has undergone a wholescale evolution that has primed the industry for material institutional engagement. We believe next-generation architecture and regulatory acknowledgment have unlocked a new market for funds, family offices, and sophisticated investors who have a fiduciary responsibility to abide by stringent security and investment criteria. The next decade may present unprecedented challenges, however, investors now have a multitude of opportunities from an emerging asset class to navigate potential volatility.

To learn more about trading digital assets visit:

[1] Coinmarketcap data as of 15 May 2020

[2] Bloomberg. Fidelity Survey Finds Institutional Investors Are Eyeing Crypto. May 2019 (link)

[3] State Street website. State Street Survey Reveals A Bright Future for Both Digital Assets and Semi-Transparent ETFs in the US. December 2019. (link)

[4] McKinsey website. Blockchain and retail banking: Making the connection. June 2019 (link)

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