May 31, 2021 - 6 min read
Ledger Enterprise Solutions (or Ledger Enterprise) presents the “Institutionalization month”. In the next four weeks, we will be focusing on the challenges, opportunities, and prospects of digital asset adoption among institutional investors. This campaign will bring you interviews and insightful analysis from industry experts and key decision-makers at leading financial institutions.
We kick off our campaign by exploring the state of digital asset institutionalization and why investors should consider joining a niche today. The upcoming articles in this series will recap how the industry evolved over the years, the milestones it achieved, and the challenges that remain.
In 1974, Roger Murray, a Columbia University Professor and director of the CBOE, published a paper called “Institutionalization of the Stock Market — To Be Feared or Favored?”. In hindsight, we know the answer.
However, back then, institutions were accused of disrupting the traditional auction markets and pushing individual investors away.
This learning experience had been a blessing in disguise in the financial markets’ history as it showed that the presence of institutional investors brings benefits on all fronts and for everyone involved. These include liquidity provision, improved price discovery, efficient capital allocation, and more. Due to this, the institutionalization of the digital assets world is something that has long been awaited**.**
Morgan Stanley likens the case for digital assets institutionalization to the one we saw with gold 45 years ago. The bank reasons that periodically, an emerging technology or product, accompanied by regulatory evolution, empower the emergence of a new asset class to ease macroeconomic stress. But digital assets’ potential expands way beyond investment returns.
The reason why institutions are now increasingly turning their focus to digital assets is their potential to revolutionize the financial system and make it more open and transparent, as KPMG concludes. Projects with stable fundamentals can help address problems like hyperinflation, bring financial services to the unbanked population, and streamline payment procedures (i.e., today it is faster to withdraw cash and carry it in person to someone on the other end of the world, than to wire a transfer). Furthermore, some DeFi protocols combine the benefits of traditional financial offerings and strip away a part of their limitations to ensure greater economic freedom, higher innovation capabilities, and improved efficiency.
On a micro level, financial institutions see digital assets as an opportunity to automate and reshape manual processes in the conventional paper-based and OTC markets. They can also help launch new marketplaces in various industries and ease the trading and tracking of existing or novel asset classes through their entire life cycle from inception to settlement and delivery. This process will allow them to serve tailor-made products to their clients and improve retention — something vital in a post-pandemic world. In that sense, the early adopters are best-positioned to capitalize on the niche’s growth opportunities.
The institutionalization of the digital assets niche, alongside retail adoption and utility, are integral parts of its maturation. The institutionalization of a niche is a sign that it is more trusted, liquid, and accessible — a tide that has the potential to lift all ships.
Digital assets have managed to cross the critical thresholds of market liquidity, regulatory scrutiny, and institutional acceptance at a time when asset management and portfolio diversification are even more challenging and meaningful. As a result, they are now becoming a mainstay in institutional investors’ portfolios.
Fidelity’s Institutional Investors Digital Asset Survey 2020 concludes that 36% of the 774 respondents currently invest in digital assets. Almost 80% of them find something appealing about the niche, while 60% acknowledge that digital assets have a place in portfolios.
And this is not just a blip following the wild digital asset market rally but a steady trend. Reports conclude that 72% of institutional investors believe digital assets are here to stay. The digital assets market is expected to grow at a CAGR of 6.18% in the period 2019–2024.
The question is no longer whether institutionalization will happen, but who is getting on board first. The list is now expanding beyond the big investment banks. The endowment funds of several Ivy League universities, including Harvard and Yale, also invest in cryptocurrencies. Even central banks are now taking a more active role in the subject.
The case is no different on a national scale. A recent Chainalaysis report concluded that 92% of the 154 countries subject to analysis have digital asset-related activity.
So, how did we get here? Most modern asset classes have become mainstream thanks to institutionalization. With digital assets, however, the main trigger was retail adoption. What was once a heavily retail-orientated market is now becoming institutional, with asset managers, family offices, and HNWIs incorporating digital assets into their portfolios.
The trend is even expected to speed up due to the dynamics on the regulatory front. SEC’s new Chairman, Gary Gensler, is well-renowned for his digital assets and blockchain technology expertise. Industry insiders consider his appointment a major positive for the industry. SEC Commissioner Hester M. Peirce also echoes these sentiments. As a result, further progress by the SEC is soon expected on the digital asset securitization front, with several Bitcoin ETFs currently pending approval.
While digital assets institutionalization is here for the long-term, it doesn’t mean challenges don’t remain. Among the factors that institutional investors are concerned about are security risks, complexity, and concerns around private key management, to name a few. With the right partner, however, these challenges can become opportunities.
Ledger was there to guide and support retail investors into the unknown when digital assets first emerged. After becoming the #1 trusted hardware wallet provider, we are now dedicated to helping institutions on their journey.
As an industry pioneer with years of experience, we now feel responsible for educating institutional investors to promote trust and accelerate the adoption of digital assets.
Through our products and services, we are determined to help build a reliable platform for new crypto and digital assets initiatives by traditional financial organizations, including international banks, asset managers, and securities clearinghouses, in their efforts to discover use cases for the technology’s assimilation in the capital market.
Stay tuned for the next piece from our campaign where we will deep-dive into the regulatory and compliance intricacies surrounding the institutionalization of the digital asset industry.