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.
[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
Disclaimer
Past performance does not guarantee future returns, and individual returns are not guaranteed or warranted.
This Document is intended solely for accredited investors, sophisticated investors, professional investors, or otherwise qualified investors, as may be required by law or otherwise, and it is not intended for, and should not be used by, persons who do not meet the relevant requirements. The content provided herein is for informational purposes only and is general in nature and not targeted to any specific objective or financial need. The views and opinions expressed in this Document have been prepared by third parties and do not necessarily reflect the views and opinions of EquitiesFirst. EquitiesFirst has not independently examined or verified the information provided herein, and no representation is made that it is accurate or complete. Opinions and information herein are subject to change without notice. The content provided does not constitute an offer to sell (or solicitation of an offer to purchase) any securities, investments, or any financial products (“Offer”). Any such Offer shall only be made through a relevant offering or other documentation which sets forth its material terms and conditions. Nothing contained in this Document shall constitute a recommendation, solicitation, invitation, inducement, promotion, or offer for the purchase or sale of any investment product by First Holdings, LLC or its subsidiaries (collectively, “EquitiesFirst”), nor shall this Document be construed in any way as investment, legal, or tax advice, or as a recommendation, reference, or endorsement by EquitiesFirst. You should seek independent financial advice prior to making an investment decision about a financial product.
This Document contains the intellectual property of EquitiesFirst in the United States and other countries, including, without limitation, their respective logos and other registered and unregistered trademarks and service marks. EquitiesFirst reserves all rights in and to their intellectual property contained in this Document. The Document should not be distributed, published, reproduced or otherwise made available in whole or in part by recipients to any other person and, in particular, should not be distributed to persons in any country where such distribution may lead to a breach of any legal or regulatory requirement.
EquitiesFirst make no representation or warranty with respect to this Document and expressly disclaim any implied warranty under law. You acknowledge that EquitiesFirst is not liable under any circumstances for any direct, indirect, special, consequential, incidental, or punitive damages whatsoever, including, without limitation, any lost profits or lost opportunity, even if EquitiesFirst has been advised of the possibility of such damages.
EquitiesFirst makes the following further statements that may be applicable in the stated jurisdiction:
Australia: Equities First Holdings (Australia) Pty Ltd (ACN: 142 644 399) holds an Australian Financial Services Licence (AFSL Number: 387079). All rights reserved.
The information contained on this Document is intended for persons located in Australia only and classified as a Wholesale Client only as defined in Section 761G of the Corporations Act 2001. The distribution of information to persons outside this criteria may be restricted by law and persons who come into possession of it should seek advice and observe any such restriction.
The material contained in this Document is for information purposes only and should not be construed as an offer or solicitation or recommendation to buy or sell financial products.
The information contained in this Document is intended to be general in nature and is not personal financial product advice. Any advice contained in the Document is general advice only and has been prepared without considering your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. You should seek independent financial advice and read the relevant disclosure statements or other offer documents prior to making an investment decision about a financial product.
Dubai: Equities First Holdings Hong Kong Ltd (DIFC Representative Office) at Gate Precinct Building 4, 6th Floor, Office 7, Dubai International Financial Centre (commercial license number CL7354) is regulated by the Dubai Financial Services Authority (“DFSA”) as a Representative Office (DFSA Firm Reference No.: F008752). All rights reserved.
The information contained in this document is intended to be general in nature, and, to the extent that it is perceived as advice, any advice contained in this document is general advice only and has been prepared without considering your objectives, financial situation, suitability of the financial products or your needs.
The material contained in this document is for information purposes only and should not be construed as financial advice, including an offer or solicitation or recommendation to buy or sell financial products. The information contained in this document is intended to be general in nature and any advice contained in this document is general advice only and has been prepared without considering your objectives, financial situation, suitability of the financial products or your needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. If you do not understand the contents of this document, you should consult an authorised financial adviser.
This document relates to a financial product which is not subject to any form of regulation or approval by the DFSA. The DFSA has no responsibility for reviewing or verifying any documents in connection with this financial product. Accordingly, the DFSA has not approved this document or any other associated documents nor taken any steps to verify the information set out in this document, and has no responsibility for it.
Hong Kong: Equities First Holdings Hong Kong Limited is licensed under the Money Lenders Ordinance (Money Lender’s Licence No. 1659/2024) and to carry on the business of dealing in securities (Type 1 licence) under the Securities and Futures Ordinance (“SFO”) (CE No. BFJ407). This Document has not been reviewed by the Hong Kong Securities and Futures Commission. It is not intended as an offer to sell securities or a solicitation to buy any product managed or provided by Equities First Holdings Hong Kong Limited and is only intended for persons who qualify as Professional Investors under the SFO. This document is not directed to individuals or organizations for whom such offers or invitations would be unlawful or prohibited.
Korea: The foregoing is intended solely for sophisticated investors, professional investors or otherwise qualified investors who have sufficient knowledge and experience in entering into securities financing transactions. It is not intended for, and should not be used by, persons who do not meet those criteria.
United Kingdom: Equities First (London) Limited is authorised and regulated in the UK by the Financial Conduct Authority (“FCA”). In the UK, this Document is only being distributed and made available to persons of the kind described in Article 19(5) (investment professionals) and Article 49(2) (high net worth companies, unincorporated associations etc.) of Part IV of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (‘’FPO’’) and any investment activity to which this presentation relates is only available to, and will only be engaged in with, such persons. Persons who do not have professional experience in matters relating to investment or who are not persons to whom Article 49 of the FPO applies should not rely on this document. This Document is only prepared for and available to persons who qualify as Professional Investors under the Markets in Financial Instruments Directive.
