The fintech sector is ever-evolving and maturing. This is resulting in an increase in the diversity of investors which includes more active participation by corporates outside of the big banks and largest insurance organizations.
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?
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:
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.
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.
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.
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.
According to Jehan Chu, Co-Founder of Social Alpha Foundation (SAF) and Co-Founder and Managing Partner of Kenetic Capital, “blockchain technology will continue to silently pervade fintech as an inexpensive, reliable, and secure layer inside of existing networks and enterprise. Emerging technologies such as AI, Big Data, and IoT will be enhanced by blockchain, creating both tokenized incentive layers to crowdsource information, as well as secure distributed information pipes to route data.
On a similar note, Jaron Lukasiewicz, Founder and CEO of Influential Capital, notes that, “security tokens are an exciting trend in finance which, even though in an early stage, is creating more buzz in the finance industry than anything I’ve seen before in blockchain. Imagine having a common protocol between all financial firms in the world so they can seamlessly transfer assets to each other compliantly – creating a truly connected global and pro-consumer financial services industry. The implication is that local and national liquidity pools (in essence, wealth) will turn into global shared liquidity, which can help fund world scale projects as they become needed in the future.”
The pace of digital change in the financial services sector seems only to be gaining momentum, and this calls for industry players to react. The blockchain and its related technologies (in this case crypto assets) promise new business models that will streamline the financial services sector and help drive trust and scale for the tokenized economy. Despite being dwarfed by traditional asset markets, which are more than $300 trillion globally, the crypto assets market will garner significant momentum in due time.