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Nearly a quarter of corporations are investing in blockchain or digital currencies in the coming year, according to the 2021 FIS Readiness Report. The institutional investment community is further behind: only 7% of buy-side respondents see providing middle- and back-office support for digital assets as a path to growth. What do both groups know that the others don’t?
Certainly, the crypto market cap is growing by leaps and bounds – 150% CAGR in past three years, reaching $1.6T in value. And it’s being led by two digital currencies: Bitcoin, the leading retail and institutional coin being invested in, and Ethereum, the coin that appears poised to drive many of the Decentralized Finance (Defi) smart contract protocols that will shape the future of capital markets.
Despite its recent volatility, crypto has gained significant institutional interest, particularly in the past two years:
- 30% growth in the number of institutions that hold more than 1,000 Bitcoins over the past year
- The current market value held by institutions is now greater than retail holdings
- 6 crypto ETF applications were filed in the past 12 months
- Cryptocurrency funds now have $60B+ in AUM
- 400% growth in Defi token market cap through June 2021, with $115B+ in assets locked in Defi protocols
FinTech has the opportunity to drive this growth for our capital markets clients with a crypto and digital assets institutional platform. This “platform” needs to function in the same way an investment operations platform performs for more mature asset classes. Specifically:
- Managers, investors and corporations need to be able to acquire and trade these crypto assets on their own behalf or that of their clients.
- They need market makers, multiple product options and exchange connectivity.
- They need pre- and post-trade compliance functionality.
- Once the crypto assets are acquired, they need to be custodied, accounted for (standalone or as part of a portfolio) and reconciled between the accounting and custody books.
- They need to be priced and marked to market on a regular basis.
- Finally, they need to be able to report on them from a regulatory perspective and provide reporting to their clients on performance.
Simple enough. Asset managers and corporations can do this today, so they can immediately start executing these same functions for cryptocurrency… right?
Unfortunately, it’s not that easy. Delivering on this integrated crypto platform poses a challenge for even established crypto players, as the technology and architectures underpinning many of these requirements are far more complex than those required to support a retail customer base or established asset classes in the institutional space.
On top of that, the market is still learning about cryptocurrency and the blockchain technology that supports it – along with the evolving regulatory dimension, as regulators around the world move to bring crypto trading under their supervision. Because don’t forget regulators around the world are racing to catch up with legislation to support stability and credibility of smart contracts, tokens and value transfer.
All of this makes creation and execution of a fully integrated crypto platform more challenging. But it’s certainly not impossible. The building blocks are there. As more and more investors look to add crypto to their portfolios and more corporations add it to their balance sheets, we’ll see the emergence of more mainstream technology and services platforms to support this infrastructure. And then the race will really be on.