Five key takeaways from Digital Assets Week 2022
FTX’s failure shouldn’t drag down blockchain
The dramatic collapse of Sam Bankman-Fried’s FTX empire has reminded the public once again that cryptocurrencies and the businesses they serve this sector are by nature unstable and intrinsically volatile. Whilst institutional interest in cryptocurrencies as an asset class peaked several years ago and has gone into decline on the back of numerous scandals and controversies, the underlying technology that makes crypto tokens possible has never received more attention than today.
As such, it was fantastic to hear speaker after speaker at the premier forum where institutional investors and service providers share expertise and ideas line up to declare that the crypto catastrophe shouldn’t be allowed to limit the discussion around blockchain and its transformative potential.
By now, the debate is mainly focused over the pace at which blockchain is likely to disrupt traditional financial processes, rather than the fundamental question of if this is possible. Whilst the high-profile implosion of FTX may well mark the end of the brief interaction between institutional investors and cryptocurrencies, there is a broad consensus that blockchain technology should not be a collateral victim of the failure of yet another cryptocurrency-related business model.
Providers of financial infrastructure need to lead the push into digitisation of assets
Whilst most of the innovation in the digital assets space is coming from start-ups, for the creation of new digital assets and the digitisation of existing assets to accelerate it is essential for central players in securities markets to get involved. This is because it is focal points in financial networks that can serve as intermediaries between various market participants, and this means when they move towards digital means, their clients will be nudged to follow suit.
Primary examples are stock exchanges, depository and clearing service providers, and even advisory firms, who all have a role to play in making it easier for asset owners and asset managers to move towards a more digital approach.
2030 is too soon, but they’ll certainly be many more digital assets in 2030 than there are today
The rate at which digital assets as a percentage of total assets will grow is extremely hard to gauge, but the consensus is that this process will certainly accelerate overt the next 8-10 years. Whilst few panellists wanted to be drawn on specific timetables, and several cautioned that past predictions of very rapid transformation have failed to materialise, by 2030 all expect to see a much higher percentage of total assets being stored and transferred in digital form than is the case today.
Scalability is the next key challenge
Whilst few can doubt the rate of innovation seen over the past decade, there is still an unanswered question over how scalable many of the new digital ecosystems really are. A key theme to emerge from various discussions was that for institutional investors to increase their exposure to digital assets of any type, they usually prefer to do this via an established and respected financial institution with a long track-record in providing custody services.
As such, a key barrier in the way of many start-ups is simply the fact that to scale they need to secure larger clients, but these larger clients themselves often have a strong in-built preference for dealing with larger companies. For this reason, partnerships between start-ups and established institutions are highly likely to be a feature of the landscape. Specifically, the interoperability between digital assets and traditional assets demanded by large asset managers is very hard to achieve for smaller companies working in isolation.
Given that the ultimate goal of all the experimentation currently taking place is to find a way to bring more liquidity to currently illiquid private assets, the importance of standardisation across the industry can hardly be overstated. As such, standardisation and interoperability at both the technology and the data level seem to be the key to identifying which systems can and will scale over the coming years.
Regulation is a key ingredient for growth
Returning to the consequences of the FTX fallout, more and better regulation is essential for the digital assets space to grow. Importantly, far from this demand for increased oversight coming from outside the digital finance community, it is being driven primarily by participants in this space.
Firms fully recognise the value that smart regulation brings – not only does this confer some legitimacy on a new asset type, but it allows the aforementioned institutional investors to have the confidence that when they enter digital assets they are dealing with reputable companies with solid risk and compliance processes in place operating on a level and regulated playing field.
In this sense, the majority view expressed at DAW was that regulation is not the enemy of innovation, but in fact the guarantor that innovation will survive and thrive and lead to the positive transformation all attendees know it to be capable of.