By Mahin Gupta, founder of Liminal, a wallet infrastructure & custody solutions platform
As the digital asset space continues to mature, innovation and real-world use cases are emerging as key drivers of institutional investment in the sector. The events of the past year have indeed highlighted the need for reform in certain sectors, such as exchanges and lending. The failures of FTX and crypto lenders like BlockFi, Celsius Network, and Voyager Digital have raised concerns about the risks associated with investing in cryptocurrency and the need for better investor protection. While the tribulations from last year gave away the prime shortcomings in the business practices of many crypto enterprises, especially in the centralised exchange and lending space, it certainly doesn’t reflect any flaw in the underlying technology.
The challenge that lies ahead for various stakeholders, including digital asset businesses, investors, developers, policymakers, and consumers, is to stay focused on the potential benefits of digital assets, identify and fix any existing issues, and establish guidelines and regulations (both formal and informal) that can safeguard investors and users while promoting meaningful innovation.
We anticipate that digital asset innovation will persist in various areas within the ecosystem. Stablecoins have significant potential for growth in real-world remittance, particularly within the regulatory regimes for instant cross-border settlements with significantly lower transaction costs. This is already happening in several countries worldwide. Governments are taking a more proactive approach to explore and develop Central Bank Digital Currencies (CBDCs). More than 100 nations are keen on launching their digital currencies, with over 10 countries already having taken the plunge and 15 currently running their own CDBC pilot projects. China was one of the first large economies to launch the digital yuan, which saw immediate success owing to the high digital penetration in the country. Banks are experimenting and tokenizing conventional financial assets to achieve substantial efficiencies in clearing and settling transactions while also facilitating faster and more affordable payments. Another example is how J.P. Morgan employs tokenization to provide clients with intra-day repo solutions through its Onyx Digital Assets platform. Meanwhile, DBS, one of Singapore’s leading banking institutions, has come up with a Digital Exchange that offers a platform for corporates to raise capital by digitizing their securities and assets, with the added benefit of being able to offer smaller denominations. Decentralized Finance (DeFi) presents an opportunity to revolutionize capital markets and broaden its scope, if appropriate safeguards are implemented. In fact, in the last 3 years, DeFi has grown more than tenfold to $160 billion in 2021 in terms of TVL (total value locked) before retreating to stand at a little over $50 billion as of October 2022.
We foresee several encouraging indications of sustained investment in digital assets. Despite the “crypto winter”, a Celent survey conducted in 2022 revealed that 91% of institutional investors are keenly interested in investing in tokenized assets. Nevertheless, the outlook varies among different subsectors.
At present, the industry is in self-cleaning/ healing mode. For the digital asset industry to thrive in a secure manner, the culture of firms and stakeholders must transform. Firms should also engage in more collaborative efforts with each other and the regulators to establish the shared standards and frameworks necessary for digital asset activities so as to improve consumer protection and transparency.
Regulatory clarity and improving infrastructure will play a significant role in making digital assets more accessible to institutional investors. As governments and regulatory bodies around the world begin to develop clear frameworks for digital assets, institutional investors are gaining more confidence in the space. Meanwhile, the development of institutional-grade custody solutions and trading platforms is making it easier for institutional investors to enter the market, increasing liquidity and reducing counterparty risk.
As the digital asset space continues to mature and new investment opportunities emerge, we can expect to see a growing number of institutional investors seeking exposure to this rapidly-evolving market.