There are a variety of reasons why institutions have been slow to truly embrace Blockchain-powered platforms and the Digital Assets they are able to create. Apart from a lack of clear regulation/legislation and a general suspicion of almost change in the financial services, a dearth of certain key infrastructure services has arguably hindered greater adoption.
The type of infrastructure required includes:
- Regulated digital exchanges - in Germany there is the Swarm Markets DeFi platform, in Switzerland (and soon to go live) the SIX Digital Exchange and in the UK, Anchor.
- Insurance - professional indemnity for firms dealing in crypto assets. Firms such as Paragon, Superscript and Aon are now able to organise this type of cover.
- Banking - whilst this continues to be a challenge for pure crypto firms, many of the banks themselves are engaged with blockchain projects and assets e.g. Commonwealth Bank of Australia, Société Générale, JP Morgan and ClearBank. Given the recent announcement from Mastercard that it is to assist the 20,000 financial institutions which use it network payments, employing digital assets is much less of a challenge.
- Investable products - finally, we have seen the launch of the world’s first ETF giving exposure to Bitcoin in the USA. In London, Kasie, an investment company focused on investing in crypto currencies has been listed on the AQSE exchange in the UK. Or how about the ‘Green Bonds’ Project Genesis, based in Hong Kong, in conjunction with the World Bank?
- Digital currencies - with increasing debt being issued using Blockchain technology, we are going to see the need for digital currencies such as the JPCoin from JP Morgan, or even Facebook’s Diem coin i.e., a variety of stablecoins. Meanwhile, governments are looking to use existing coins, such as Bitcoin in Venezuela, and now potentially Zimbabwe. Meanwhile, other governments are considering issuing their own Central Bank Digital Currencies (CBDCs).
- Benchmark and indices - in equity and bond markets there are indices such as the Morgan Stanley Capital Index (MSCI) or Standard and Poor’s (S&P 500) which have been created to track the performance of different assets and funds. Asset managers will be able to create mutual funds or EFTs to track/outperform these indices/benchmarks. Popular indices such as the FTSE 100 (UK), S&P 500 (USA), CAC40 (France) and Nikkei 225 (Japan) will track the performance of the largest quoted equities in these respective markets. Recently, a firm called Cryptocompare was authorised by the UK’s FCA to issue crypto benchmarks and so it will enable asset managers to create products that track these benchmarks.
The infrastructure needed to enable greater engagement by institutions is being established and whilst regulations are still required to give regulated firms more guidance and certainty, we are seeing sectors such as DeFi and NFTs growing rapidly and attracting more and more interest. The whole market for blockchain-powered platforms and the digital assets they can issue and trade has evolved considerably in 2021, with major institutions in the financial, healthcare, gaming and retail sectors (and now even governments) becoming engaged as they look to issue CBDCs. The pace of change appears to be quickening as institutions understand the opportunities and potential that Blockchain technology can offer - often in conjunction with other complimentary technologies. However, this is not a panacea - much education is needed. If the potential benefits are to be realised for using blockchains and digital assets to reduce costs, improve efficiency and make processes and systems more transparent and inclusive to aid society at a macro level, we need to keep challenging the current status quo before our competitors do!
This article first appeared in Digital Bytes (17th of November), a weekly newsletter by Jonny Fry of Team Blockchain.