Market vagaries aside, crypto keeps moving towards mainstream adoption

Despite the vagaries of the cryptocurrency market, adoption of blockchain and digital assets by financial institutional continues growing strongly. A newly released survey by Citi Securities Services reveals that nearly three quarters of them are currently actively engaged in related initiatives, up from 47% in 2022.^[1]

There also now appears to be a clear consensus among major financial institutions that all assets will eventually be tokenized, and that blockchain will underpin the future of financial infrastructure.

The benefits of what BlackRock CEO Larry Fink describes as “the next generation for markets” include greater liquidity, operational efficiency and accessibility. ^[2]

The ever-growing chorus of firms highlighting the multi-trillion-dollar tokenization opportunity includes AllianceBernstein,^[3] Bank of America,^[4] BlackRock,^[5] BNY Mellon,^[6] Boston Consulting Group (BCG),^[7] Citi, Goldman Sachs, HSBC, JP Morgan, Northern Trust^[8] and PwC. BCG, for example, predicts that some $16 trillion worth of assets, most of which are illiquid, will be tokenized by 2030,^[9] while Northern Trust and HSBC estimate that up to 10% of all financial assets will be tokenized by then.

Shifting financial rails

The tokenization of all real assets will likely have a profound impact on the digital asset market. After all, the total market cap of all cryptocurrencies currently hovers at around $1 trillion, compared to an estimated $230 trillion worth of securities across the world’s capital markets and the $300 trillion-plus global real estate market.

This could mean considerable upside for specific digital assets. Securities-based financing provides a compelling way of gaining exposure to them.

It is unclear, however, whether the inexorable wave of tokenization will buoy the current batch of cryptocurrencies or wash them away.

The answer could lie somewhere in the middle, with safe, stable, efficient, useful and well-established cryptocurrencies set to benefit from growing confidence and adoption of digital assets, while the less desirable ones fall by the wayside—similar to what happened with internet companies following the bursting of the dotcom bubble.

What is also clear is that in light of the scams and hacks that continue to plague the decentralized finance (DeFi) space, digital assets will not be able to achieve mainstream adoption unless they are provided within a safe, trusted and compliant environment that mirrors established financial and capital markets.

In other words, digital assets will not achieve meaningful scale without the safeguards and infrastructure provided by regulators and financial institutions.

Though DeFi played a crucial role in demonstrating the viability of a new way of creating and distributing financial services, the future is unlikely to be fully decentralized, and financial institutions will have a critical role in bringing a new blockchain-powered paradigm to the masses.

As such, investors seeking to gain exposure to opportunities created by the transition of financial infrastructure to blockchain technology could look to the incumbent institutions leading the charge as much as to cryptocurrencies and digital assets.

Breaking the US regulatory deadlock

According to the Citi survey, one of the biggest factors holding back this vision and the widespread use of digital assets in the next three years is regulatory uncertainty around governance, legal and risk aspects.^[10]

Perhaps the biggest hold-up is in the US,^[11] where regulators have yet to provide clarity on digital assets. In contrast, regulators in Europe^[12]  and Asia^[13] have provided clear guidance.

The US Securities and Exchange Commissions is also delaying its decision^[14] on allowing a spot Bitcoin-linked ETF by the likes of Blackrock and Fidelity, while Europe’s first spot bitcoin ETF^[15] went live in August.

It is worth noting, however, that the US does have several crypto- and blockchain-related equity ETFs, which dominate the list of 15 top performing ETFs this year.^[16] So, whenever the US does allow Bitcoin-linked ETFs, there is likely to be strong demand.

This divergence between the US and other developed markets is not likely to persist. The longer the US delays, the further it will push its crypto firms and innovators abroad.^[17] Once memories of the recent FTX-debacle and crypto meltdown fade, and US regulators realize the rest of the world is moving ahead without them, they will likely change their tune.

Of course, there are several other factors that will be crucial to achieving widespread crypto adoption, including improved education, enhanced interoperability, better infrastructure and stronger security. These, too, will eventually fall into place, setting the stage for crypto to go mainstream.

Acting on crypto convictions with securities-based financing

For now, some argue that even though crypto has been around for 14 years, it is still “early.” Only when crypto achieves mainstream adoption will it have sufficient scale to support a host of exciting use cases, from streamlining international payments to powering the economies of virtual worlds.

Investors wishing to pursue opportunities based on their views about how the current regulatory deadlock on digital assets in the US will play out and how the overall cryptocurrency market will shape up could consider securities-based financing. It allows investors to use their crypto or equities as collateral to unlock liquidity with which they can take new positions or diversify their portfolios without sacrificing the upside potential of their current holdings.

In this way, securities-backed financing serves as a convenient, powerful and flexible tool, allowing investors to act on their convictions about whether crypto is indeed still early.

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[1] https://www.citibank.com/mss/docs/Citi_Securities_Services_Evolution_2023.pdf

[2] https://www.forbes.com/sites/davidbirch/2023/03/01/larry-fink-says-tokens-are-the-next-generation-for-markets/?sh=75e61e347bb1

[3] https://www.coindesk.com/business/2023/06/20/tokenization-could-be-a-5t-opportunity-led-by-stablecoins-and-cbdcs-bernstein/

[4] https://cryptonews.com/news/bank-of-america-forecasts-transformative-role-of-tokenization-finance.htm

[5] https://www.forbes.com/sites/roomykhan/2023/06/29/asset-tokenization-a-trillion-dollar-market-opportunity-jp-morgan-blackrock-and-goldman-think-so/?sh=40bf7cd64ff0

[6] https://cryptoslate.com/bny-mellon-focusing-on-digital-assets-sans-crypto-calls-tokenization-next-wave-of-securitization/

[7] https://www.bcg.com/publications/2022/relevance-of-on-chain-asset-tokenization

[8] https://www.ledgerinsights.com/hsbc-northern-trust-tokenized-by-2030/

[9] https://documents.addx.co/relevance_of_onchain_asset_tokenization_in_crypto_winter.pdf

[10] https://www.citibank.com/mss/docs/Citi_Securities_Services_Evolution_2023.pdf

[11] https://www.bloomberg.com/news/articles/2023-05-02/coinbase-international-exchange-launches-as-tensions-with-us-regulators-grow

[12] https://www.ogier.com/news-and-insights/insights/the-worlds-first-comprehensive-crypto-laws-have-been-approved-by-eu-parliament/#:~:text=To%20address%20this%20issue%2C%20the,into%20effect%20in%20July%202024.

[13] https://www.bloomberg.com/news/articles/2023-08-04/asia-s-crypto-regulatory-clarity-contrasts-with-disarray-in-us

[14] https://cointelegraph.com/news/bitcoin-etf-approval-2024

[15] https://finance.yahoo.com/news/first-spot-bitcoin-etf-europe-043122981.html#:~:text=Jacobi%20Asset%20Management%2C%20headquartered%20in,years%20after%20receiving%20initial%20approval.

[16] https://cryptopotato.com/this-figure-proves-us-is-lightyears-ahead-of-europe-on-crypto-adoption/

[17] https://www.nytimes.com/2023/06/07/technology/crypto-firms-start-looking-abroad-as-us-cracks-down.html