Over the past year, investments in digital assets have exploded.
The size of the market opportunity for digital assets is a significant draw for investors, with over $14 trillion in volume traded in crypto markets in 2021– a figure that is expected to increase exponentially in the years to come.
Demand for regulated crypto investment products has been a notable area of development, with traditional investors seeking exposure to this new asset class. Today, a range of exchange-traded products (ETPs) listed on traditional exchanges simplify access to this asset class, allowing a wide range of participants to easily invest in digital assets. Nearly all of the major tier-one banks are now in advanced stages of developing digital asset capabilities, with those that have yet to launch capabilities working on product launches this year.
In October last year, the the first Bitcoin Futures ETF has started trading in the United States, representing a landmark moment for the industry in the adoption of crypto assets. The listing saw one of the biggest first days ever for ETFs, with the ProShares ETF bringing in more than $550 million for investors.
While the United States has been making headlines around the world, Europe has been leading the charge for some time now. German Deutsche Boerse and Swiss exchange SIX offer a litany of regulated crypto investment products, from crypto index funds to Bitcoin and Ethereum ETPs, with more than 100 underlying crypto investment products now listed on SIX.
Borse Stuttgart, Germany’s second largest stock exchange, also successfully launched a trading platform for digital assets– demonstrating a new blockchain-based business model for exchanges is rapidly gaining momentum. This is also not a phenomenon limited to Europe, DBS, the largest bank in Southeast Asia, has been a notable leader in the region, with its digital exchange generating significant traction, with more than 500 institutional investors integrated into the exchange since its launch.
The business case for digital assets is now clear. To date, native crypto exchanges have dominated the trading of crypto assets, becoming global conglomerates in the asset class. Exchanges like Coinbase has become a listed giantwith a company valued at $86 billion when it went public last year.
That said, the rapid growth of crypto exchanges has been tempered recently by structural issues, including relationships with regulators, asset security, compliance, and brand trust. This creates a short window of opportunity for organizations with such qualities to capitalize on.
Traditional exchanges are deeply trusted members of the financial services ecosystem, having built strong networks over decades with customers and regulators. The opportunity for exchanges in the integration of digital assets in their company lies in these networks, their culture of compliance and the practices of information security of institutional level. It’s time for adoption.
The next phase is approaching
Structured investment products are just the first step in the digitalization of finance. Many exchanges around the world have watched with fascination the incredible speed of innovation in the blockchain industry and are quietly implementing roadmaps on how they can incorporate the technology into their business.
Offering attractive business models for traditional exchanges, crypto yield services in decentralized finance (DeFi), staking, crypto borrowing and lending are also in high demand among investors struggling to find yield in the current macroeconomic climate. The global NFT market, which has grown to more than 40 billion dollars in less than a yearis currently dominated by a few large native crypto markets – offering access to such investments via traditional exchanges would greatly expand the range of participants who can access the investments.
While such services are ripe for adoption now, the most important blockchain-based use case for exchanges may arise further in the future. Asset tokenization offers real paradigm-shifting opportunities for capital markets as we know them today. Currently, there are trillions of dollars worth of illiquid assets, for example, land, works of art and precious stones, which a wide range of investors find difficult to access in currently compartmentalized markets. Moreover, the markets that exist are fundamentally limited in terms of frictions and inefficiencies, from excessive intermediation to territorial barriers, these barriers ultimately make it harder for buyers and sellers to connect and trade anywhere. where, anytime.
Tokenization would change this dynamic by converting the ownership rights of a given asset into a digital token that can be managed and traded on the blockchain. These processes provide a new model of fractional asset ownership in which independent investors can join together to generate, buy or sell shares from any asset of value.
The potential for such technology to revolutionize existing financial markets is already in advanced stages of development. SIX, a notable industry leader, has launched a blockchain-based stock exchange and securities depository in November, issuance of a CHF 150 million digital bond on the blockchain to demonstrate its new regulated infrastructure.
The implications of this new market model are significant. Fractional ownership can boost liquidity by making bankable and non-bankable assets accessible to a much wider pool of investors, and in turn, increasing secondary market trading volumes.
It’s time for innovation
There is no longer a place to sit on the sidelines when it comes to digital assets. Digital assets and the infrastructure to manage them will be critical to the continued development of capital markets. A mature, institutional-grade infrastructure has been in place for some time now, enabling businesses to make the transition.
Regulations, once a barrier to the adoption of these technologies, are increasingly moving in a positive direction. In Europe, Switzerland has enacted a DLT law that allows a wide range of crypto and blockchain-based corporate activities, while the EU Crypto-Asset Market Framework (MiCA) progressing at a steady pace in the legislative process. Across the Atlantic, a number of regulatory bodies in the United States, including the Federal Reserve, the Federal Deposit Insurance Corporation (or FDIC), and the Office of the Comptroller of the Currency (OCC) released a statement that they provide guidance on the ability of banks to provide crypto services in the country in 2022.
Exchanges are in a unique position in their ability to enable the adoption of digital assets. With leaders, such as SIX, providing a model for success, other countries and exchanges will quickly follow. Those who don’t risk being left behind.
Craig is Vice President of Sales at METACO, a leading provider of security-critical software and infrastructure enabling financial institutions to enter the digital asset ecosystem. Previously, Craig was Global Head of Sales and Regional Head of Americas Securities Services for Standard Chartered Bank.