Crypto assets and Institutionalization of Crypto Assets: Fintech 2019

Across all regions of the world, we are witnessing more participants who are recognizing the need to embrace fintech and are making investments either directly or through participation in accelerators, incubators or innovation consortia.

Similarly, new technologies such as crypto assets are hitting the fintech mainstream and gaining widespread acceptance. As we saw in Q1 and Q2’ 18, blockchain (the technology behind crypto assets) drew a significant amount of attention from investors. Investor interest during the first half of the year saw a $100 million+ round to Circle Internet Finance in the U.S. and $77 million to Ledger in France. The U.S. was particularly active on the blockchain front, with total investments in the first half of 2018 already exceeding the total seen in 2017.

So the big question is: What do crypto assets mean to the fintech sector? How will it impact the financial industry in the long run?

• Through this article we want to look into the crypto asset phenomenon, understand how it fits into the evolving fintech ecosystem and how it can address real problems in the global financial services industry.

Crypto assets are gaining traction and becoming buzzwords in the Fintech sector. Figures from a recent survey by Reuters indicate that one in five financial institutions is considering trading cryptocurrencies in the coming months.

In fact, crypto assets are competing against traditional asset classes of stocks, bonds, commodities, and derivatives for investment dollars and that’s according to studies:

• The total market capitalization of cryptocurrencies is estimated at $211 billion.


• Bitcoin- the largest crypto by market capitalization has experienced an exponential increase in value since 2009, trading around $6,583 per Bitcoin as of September 30, 2018.


• In terms of retail participation, Coinbase users grew by 100,000 during the 2017 Thanksgiving weekend alone. Interesting to note is that the number of users on crypto exchange platforms is estimated to be greater than 30 million.


• In terms of institutional participation, major financial services institutions, such as Fidelity, are launching crypto products and services.


• Data shows that there are now more than 2,000 crypto-assets, which include newer types of assets, such as stablecoins.


• Initial coin offerings (ICOs) have raised $5.4 billion in 2017. In 2018, ICOs have already raised a staggering $14.2 billion as of 29th August, 2018.


• Venture capitalists have already invested $3.9 billion in blockchain and crypto companies in 2018


• On the new Fintech trend-security tokens, tZero obtained a letter of intent for sale of $160 million worth of tZero security tokens while data from security token platform- Polymath shows that security token offerings will prevail on the market by 2020 and will be more than $10 trillion.

Let’s have a detailed look at some of the use cases of crypto assets

• Bitcoin which mirrors an investible asset class can become a store of value that is natively digital, generational relevant, and an alternative to traditional asset classes. There is a reason why Tim Draper, American Venture Capitalist, Author, Founder of Draper Associates, DFJ and Draper University, strongly believes Bitcoin will hit 250K by 2022. Creating the necessary infrastructure for responsible financialization (just like the way money can be borrowed) of Bitcoin and other crypto assets will attract major fiduciary institutional investors. This involves finding ways to lend bitcoin without corrupting it by creating more claims to bitcoin than there are bitcoins.


• We’ve seen how the Ethereum platform has enabled Initial Coin Offerings (ICOs) as an alternative means for companies and start-ups to raise capital. Despite the lack of governance, accountability & investor protection and increase in fraud, ICOs will reinvent the financial sector and provide new pathways and more efficient flows for capital from a wider pool of investors.


• Disintermediation- studies show that Litecoin has so far facilitated the transfer of $99 million for less than $1 of transaction fees within minutes. The best part is that this transaction could have been initiated by anyone across the globe without the need for any intermediaries or third parties.


• Tokenization- this refers to the creation of natively digital tokenized representations of traditional and emerging assets that are issued, traded and managed on a blockchain; this reduces friction and overhead costs associated with the issuance, transfer, and management of traditional assets such as securities, commodities, and real estate assets. According to Brock Pierce, American Entrepreneur, Venture Capitalist, Chairman of the Bitcoin Foundation and co-founder of EOS Alliance,
  “a quadrillion dollar market is unfolding, driven by the emergence of security tokens. As currencies are tokenized, as bonds are tokenized, as equities are tokenized, as currencies and real estate and energy are tokenized – we are watching the birth of a quadrillion-dollar market…”
  The takeaway is crypto assets that are tokenized versions of traditional assets could also fit well within existing regulatory frameworks. We believe that tokenization of traditional assets could also increase liquidity, codify rules and regulations, and improve transparency throughout the asset lifecycle.

As crypto assets mature and become less volatile, we will start seeing their real impact in terms of reducing friction and inefficiencies that currently exist within the financial sector.

As earlier mentioned, as the financial sector evolves, we will start seeing how crypto assets will fit into this ecosystem. According to KPMG, institutional adoption of crypto assets can really be a game changer. The firm defines institutionalization as the at-scale participation in the cryptocurrency markets of banks, broker dealers, exchanges, payment providers, fintech companies, and other players in the global financial services ecosystem.

• Coinbase, for instance, is building the infrastructure that will enable financial institutions to join the crypto bandwagon. This includes: a high-frequency, low latency matching engine, transparent and efficient price discovery tools and a qualified custodian that allows the safe storage of assets in a compliant manners.

Wyoming, on a similar note, is taking steps to facilitate crypto asset lending and institutionalization. The state recently introduced a bill that seeks to clarify the legal position of digital assets, as well as offer digital asset custody through banks rather than financial institutions. The bill classifies digital assets into three categories: digital assets, digital securities, and virtual currencies which give cryptocurrencies the same treatment as money within the state of Wyoming.

Let’s have a detailed look at how institutionalization of crypto assets can reshape the financial sector.

• Access to financial services

We know that access to financial services in some countries is not a seamless process. In Argentina, for example, where the issue of hyperinflation is on the rise, institutionalization of crypto assets can really help a lot. Developing a globally accessible, decentralized store of value could significantly stabilize the country’s economy. Bitcoin could for one represent such a store of value in the future.

• Access to payment networks

The current payment system is characterized by a lot of inefficiencies and has many intermediaries. As a result, moving money around the globe is quite difficult thanks to the use of proprietary, bespoke payment networks that do not always interact with one another. However, a truly open global financial system, one that is free of intermediaries and based on a peer-to-peer network, will encourage the technological innovation necessary to create a fast, inexpensive payment network that connects anyone, anywhere.