The Stage Is Set for Institutional Adoption of Crypto
By Javier Rodriguez-Alarcon, Chief Commercial Officer and Head Digital Investments Strategies, at XBTO
The recent resolution involving Binance represents the latest milestone in the cryptocurrency industry's journey towards maturity. During this period, efforts to address systemic risks and the exit of vulnerable participants have been notable.
The significance of the industry's transition from an alternative financial system to a regulated and predictable environment cannot be overstated. The market is actively evolving into one that institutions can readily embrace. Consequently, the industry stands at the threshold of its next wave of adoption.
With an influx of new institutional players moving to the space, how can they set themselves apart from the competition and emerge as the winners of the evolved digital assets landscape? Below are four key tenets that institutions may adopt to succeed in the next market cycle.
1. Products that bring TradFi and digital assets together
We are seeing a new era of convergence unfolding between traditional finance and digital assets. Financial institutions are increasingly embracing digital assets and finding great success. For example, Chicago Mercantile Exchange (CME), a global derivatives marketplace founded in 1898, began offering Bitcoin futures to clients in 2017 and is now the second largest exchange to offer the asset class, behind only Binance. During this next phase for the industry, market leaders will likely be those that create products that intersect between the two realms.
To achieve this, it's essential to grasp the evolution digital assets have undergone since their inception. Now, with more data available from several market cycles, institutions and investors can more effectively assess digital assets' risk/return profiles. With this informed understanding, the asset class can be said to be more mature and accessible in the eyes of prospective investors. Many institutions are opting to house digital assets within traditional financial structures, not only evidenced by CME, but also the large number of spot Bitcoin and Ethereum ETF applications. This brings the asset class into familiar territory for both the institution offering the asset and the investor engaging with it.
2. Ingrain a compliance and risk-centric culture in the institutional DNA
The next market cycle will focus on engaging with digital assets in a regulated and compliant manner. The industry still has some ways to go following the high profile collapses seen over the last two years. Going forward, regulation and risk management will become a prerequisite for any institution to engage with crypto.
Much progress has been made in terms of risk management and regulatory frameworks for digital assets. There are several progressive jurisdictions who already benefit from credible, comprehensive guidelines that institutions can partner with, such as the Market in Crypto-Assets Regulation (MiCA) in the EU and the Digital Assets Business Act (DABA) laid out by the Bermuda Monetary Authority.
3. Adapt field-proven security frameworks to digital assets
Today's best practices in security constructs from the traditional finance industry are relevant when it comes to digital assets. For example, security architecture should always prevent a single point of failure - which has been the foundation of traditional security frameworks. Additionally, while cybersecurity concerns may be magnified in the digital asset space, risk mitigation operates within the same structures as with traditional industries. So, institutions who can adapt well-tried frameworks will be able to scale effectively in digital assets.
On the other hand, for the risks that cannot be managed using traditional methods (e.g. custody of digital assets), crypto-native securities companies are very well placed to close the knowledge gap and offer financial institutions services and products that can help them mitigate these risks. Doing so will allow institutions to overcome the idiosyncratic risks inherent to blockchain technologies.
4. Engage in mutual collaboration with native digital asset firms
The industry is witnessing what may have been inconceivable not so long ago: multiple collaborations between traditional financial institutions and digital asset firms. For example, APEX the largest fund administrator and XBTO to provide regulated custody and digital assets execution to their institutional clients, JPMorgan recently collaborated with interoperability layer Axelar, infrastructure provider Oasis Pro and Provenance Blockchain to tokenize funds. Additionally, Paypal has partnered with New York Department for Financial Services (NYDFS)-regulated Blockchain infrastructure provider Paxos to offer Stablecoins to its users. Other institutions that follow suit may put themselves in good stead to lead in the next market cycle.
Financial institutions already have a number of options to partner with when it comes to native digital asset market participants with a strong compliance, risk management and security culture. And in turn, digital asset companies can learn a lot from institutions in terms of compliance, governance and organisation, all of which will be helpful to avoid some obvious pitfalls. Collaboration between both parties will be key going forward.
2024: A new era for digital assets; the year of financial convergence
The changes being seen in the space provide good reason to be excited for what lies ahead. The industry is becoming more mature, safer and, therefore, more appealing to institutional investors on the sidelines. 2024 could be the year where we finally see widespread and sustainable institutional adoption of digital assets.
About the author:
Javier is a very traditional finance asset manager, having worked at Goldman Sachs for almost 14 years, and Barclays Global Investors before that. His experience has given him a great deal of commercial experience, as well as technical skills - which help him thrive in the crypto industry.
His length of service in the TradFi space allows him to bring a fresh, innovative perspective to the digital assets space. He is bringing tried and tested investment methodologies to crypto, helping to converge both industries.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.