By Craig Perrin, VP of Sales at METACO
Over the past year, investment in digital assets has soared.
The size of the market opportunity for digital assets is a significant draw for investors, with over $14 trillion in volume traded in the crypto markets in 2021–a figure expected to rise exponentially in the coming years.
Demand for regulated crypto investment products has been a notable area of development, with traditional investors keen for exposure to this new asset class. Today, a range of exchange-traded products (ETPs) listed on traditional exchanges simplify access to this asset class, enabling a broad range of participants to easily invest in digital assets. Almost every major tier one bank is now at an advanced stage of development in digital asset capabilities, with those who have not yet launched capabilities working towards product launches this year.
In October last year, the first Bitcoin Futures ETF began trading in the United States, representing a landmark moment for the sector in the adoption of crypto assets. The listing saw one of the biggest first days on record for ETFs, with the ProShares ETF bringing in over $550 million from investors.
While the US has captured headlines around the globe, Europe has been leading the charge for some time now. Germany’s Deutsche Boerse and Switzerland’s SIX exchange offer a litany of regulated crypto investment products from crypto index funds to Bitcoin and Ethereum ETPs, with over 100 crypto underlying investment products now listed on SIX.
Borse Stuttgart, the second largest exchange in Germany, has also successfully launched a trading venue for digital assets–demonstrating a new blockchain based business model for exchanges is rapidly growing in importance. Nor is it 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 over 500 institutional investors onboarded on the exchange since its launch.
The business case for digital assets is now clear. To date, crypto native exchanges have dominated the trade of crypto assets, growing to become global conglomerates in the asset class. Exchanges like Coinbase have become publicly listed giants, with the business valued at $86 billion in its IPO last year.
That said, the rapid growth of crypto exchanges has been tempered lately 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.
Traditional exchanges are deeply trusted members of the financial services ecosystem, having built strong networks over decades with clients and regulators. The opportunity for exchanges in integrating digital assets into their business lies in these networks, their culture of compliance, and institutional-grade information-security practices. The time is ripe for adoption.
The next phase draws closer
Structured investment products are only the first step for the digitization of finance. Many exchanges around the world have watched the incredible speed of innovation in the blockchain industry with fascination, and are quietly implementing roadmaps for how they can fit the technology into their business.
Offering enticing business models for traditional exchanges, crypto yield services in decentralized finance (DeFi), staking, crypto borrowing, and lending are also in high-demand among investors finding it difficult to find yield in today’s macroeconomic climate. The global NFT market, which has grown to over $40 billion in less than a year, is currently dominated by a few major crypto native marketplaces–offering access to such investments via traditional exchanges would vastly expand the array of participants who can access investment.
While such services are ripe for adoption now, the most significant blockchain-based use case for exchanges may come further into the future. Asset tokenization offers genuinely paradigm-shifting possibilities for the capital markets as we know them today. Currently, there are trillions of dollars of value in illiquid assets, for example, land, art, and gemstones, which are difficult for a broad array of investors to access in currently siloed markets. Furthermore, markets which do exist are fundamentally limited in terms of frictions and inefficiencies, from excessive intermediation to territorial barriers, these barriers ultimately make it more difficult for buyers and sellers to connect and exchange anywhere, at any time.
Tokenization would change this dynamic by converting the ownership rights of a given asset, to a digital token that can be managed and exchanged on the blockchain. These processes provide a new model of fractional asset ownership whereby unrelated investors can pool together to generate, buy, or sell shares from any valuable asset.
The potential of such technology to revolutionize existing capital markets is already in advanced stages of development. SIX, a notable leader in the industry, launched a stock exchange and depository for blockchain-based securities in November, issuing a 150 million CHF 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 broader pool of investors, and in turn, increasing the trading volumes of secondary markets.
The time is now for innovation
There is no longer room for sitting on the sidelines when it comes to digital assets. Digital assets and the infrastructure required to manage them will be key to the continued development of the capital markets. Mature institutional-grade infrastructure has been in place for some time now, enabling firms to make the transition.
Regulation, once a roadblock to adoption of such technologies is increasingly moving in a positive direction. In Europe, Switzerland has enacted a DLT law that allows for a wide range of crypto and blockchain-based enterprise activity, while the EU’s Market in Crypto-assets (MiCA) framework is progressing at pace through the legislative process. Across the Atlantic, a number of regulators in the US, including the Federal Reserve, Federal Deposit Insurance Corporation (or FDIC), and Office of the Comptroller of the Currency (OCC) have issued a statement that they will provide guidance on the capacity of banks to deliver crypto services in the country in 2022.
Exchanges have a unique position in their capacity to enable the adoption of digital assets. With leaders, such as SIX, providing a blueprint for success, other countries and exchanges will quickly follow suit. Those that fail to do so, risk being left behind.
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Craig is VP 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 Securities Services Americas for Standard Chartered Bank.
