The Unstoppable Rise of Digital Assets: Compete, Collaborate or Both?

Digital assets are a big topic of conversation these days. Cryptocurrencies, NFTs, and blockchain technology are now part of our everyday vernacular. But the reality is that the bitcoin whitepaper is just over a decade old, so these asset classes are still in their nascency.

Despite the relative newness of digital assets, the industry is growing rapidly. New players are entering the market and customers are seeking diverse ways to invest. This is pushing traditional financial institutions to make a choice: get in the game or get left behind.

To discuss the unstoppable rise of digital assets, we invited an all-star panel to the table at the Fintech and Paytech Summit APAC 2021. The panelists included: Mariana Gomez de la Villa, Program Director Distributed Ledger Technology, ING Bank; Irfan Ahmad, APAC Lead, State Street Digital, State Street; Mohamad Zarket, Director, Digital Assets Union, BNY Mellon; Grace Chong, Regulatory & ICT Lead, Simmons & Simmons; and moderator Aly Madhavji, Managing Partner, Blockchain Founders Fund.

Together we discussed a variety of topics surrounding digital assets. But it all comes down to this: they are here to stay! They only question is, how do we adapt?

Why Are Major Institutions Joining the Digital Asset Space?

The last decade or so has been, what Grace Chong described, the “wild, wild West” of digital assets. There has been rapid growth, innovation, education, and development in the area. But until recently, many traditional financial services, major institutions, and banks have not been involved.

So, why are major institutions joining the space? And, why now? Mohamed Zarket shared three reasons why:

1. Supply and demand. Quite simply, clients and customers want to invest in digital assets and are want financial institutions to offer products and services in the space. Increased demand puts pressure on major institutions to build their digital asset infrastructure.
2. Innovation. As new applications and services open doors across the industry, there is a space to serve and help clients. Innovation in the digital currency space impacts clients and banks are starting to look at how they can support them through it.
3. Regulatory clarity. This is increasing around the world and allows banks and large institutions to bring digital assets as an option. Increasing regulatory clarity helps banks treat it as an emerging asset class and provide a level of security and stability.
   

Irfan Ahmad agreed, stating that demand—especially from high net-worth individuals—was a huge driver for major institutions to join the digital asset space. Additionally, regulatory clarity allows institutions to develop seamless solutions across markets. They can finally build a scalable and secure model instead of stepping completely out into the unknown.

Bottom line is this: clients want digital assets, and major institutions are quickly learning how to provide solutions.

Digital Assets: Risk & Regulation

As mentioned, digital assets are a new asset class. This, along with the nature of how they operate, mean that they can be highly volatile and include a significant level of risk to investors. High levels of risk and non-regulation leads to the question: should business be integrating them into operations? Is it too risky?

Mariana Gomez de la Villa shared her belief that the time to ignore digital assets has passed. They are here to stay, and it’s time for major institutions to get on board, or risk being left behind. This is particularly true after the pandemic, which shifted so many things in finance.

Mariana shared: “It’s an interesting place to be in, at an inflection point where you grab what you’ve learned coming out from COVID, and grab what you’ve learned in the ecosystem—how is everyone going to merge that and find those niche markets to find a role in the future?”

If major institutions are going to pursue digital assets, they need to also find ways to mitigate risk and keep investors happy. There are two main ways to accomplish this:

• Education: Everyone is learning as they go. Investors, banks, regulators, custodians—there is a steep learning curve in the digital asset space. As education increases, more innovation and solutions are possible.
• Regulatory clarity: As mentioned earlier, this is increasing. As the industry continues to gain clarity, risk can be mitigated for clients and investors. Grace Chong shared that “as regularity clarity improved, we saw more and more institutional players—the private hedge funds, the big banks— also move into this sector in greater succession.

Despite the risk of unregulated digital assets, banks and financial institutions cannot sit on the sidelines. Instead, they need to continue to learn, innovate, and improve offerings to meet customer needs.

Digital Asset Custodians

One concern of many investors is security and stability. Because much of the digital asset market is, so far, unregulated, new infrastructure is needed before there can be widespread adoption of digital assets. Digital asset custodians are critical building blocks in this infrastructure.

Grace Chong has observed an increased expectation from regulators that there should be independent custody instead of self-custody over digital assets. This has led to an increase in new companies who are eager to be licensed as digital asset custodians. Partnerships between fintech and traditional financial services are also on the rise to help meet the regulatory needs of digital assets.

Digital custodians are a key piece to the widespread adoption of digital assets because they can safeguard assets and ensure compliance with regulatory standards.

How to Best Serve Customers

One of the drivers of major institutions adopting digital currency is customer demand. High net-worth clients and others are eager and excited about the opportunities presented through digital assets. For some it may be about jumping on current trends, whereas others are deeply interested in new, emerging technologies. This demand and interest from customers lead banks and other institutions to ask: how can we best serve customers?

One way to do this is to offer both direct and indirect investment options:

• Direct investment in digital assets is when clients or customers purchase and hold cryptocurrencies directly. This can be done on an individual or institutional level (i.e., Tesla investing in Bitcoin).
• Indirect investments look different in various jurisdictions. In some places, investors can be exposed to crypto markets by purchasing crypto ETFs or investing in companies that have cryptocurrencies as a base of their operations.
  

The direction an investor takes depends on why they want to invest in the first place—is it just because it’s trendy? Is it part of their overall strategy? Are they interested in the technology behind it? Banks and financial institutions need to work with clients to determine why they are getting into digital assets, which then determines which solution will work for them.

Banks and other major institutions can also serve their clients by working on all the practical behind-the-scenes operations. Mohamed Zarket shared that, currently, “we’re putting the rail and infrastructure, but once it’s ready at the institutional level … then the opportunities are endless.” It will take time to invest in key infrastructure, but companies need to start working on it now to be ready as demand from customers increases.

Mariana shared the huge effort to build infrastructure to support digital currencies. It’s an involved process that touches on every area, including:

• Information systems and technology for customer support.
• Product management for new innovations.
• Risk management for safety and security.
• Operations and systems management for day-to-day needs.
  

Finally, putting the customer’s needs first is important. Customers expect that a regulated financial institution will offer a level of protection and certainty. So, major institutions may have strict regulations on their services, but it is in the effort to protect investments.

Irfan Ahmad said it this way: “Whilst it might seem that certain jurisdictions are performing relatively draconian measures to stem the flow of assets into crypto exchanges, it’s all to do with the fact that they’re trying to protect the end investors. IT might be cautious, but we all have to remind ourselves the bitcoin whitepaper was only put out 12 years ago, and as an asset class it’s very young.”

Conclusion

Digital assets are not going anywhere any time soon. In fact, our panelists were excited and optimistic of the next 5-10 years in the industry. Things are moving and evolving rapidly, and companies—both traditional and emerging—will have to also move quickly to stay in the game.

And beyond the changing infrastructure, we will also see more partnerships. Grace is excited for more collaboration between fintech companies and traditional banks or institutions—the more they work together, the more solutions will be available to customers and investors.

No matter what happens in the future, the digital asset space is sure to be exciting! If you are interested in more conversations and education about digital assets, the payments landscape, and other current issues, make sure to check out the Fintech and Paytech Connect Summit. We have gathered experts from all over the industry to discuss exciting innovations and future opportunities in the world of financial technology.

You can also check out the recording of the session here: