Yes, the digital asset industry has experienced significant growth and maturation in recent years, presenting numerous opportunities for financial institutions. According to Facts and Factors, a market research company, the global digital asset market capitalization was valued at $1.2 trillion as of March 8, 2023, up from $800 billion in 2021. The number of digital asset users is expected to reach 1.7 billion by 2025, up from 300 million in 2021. The number of financial institutions offering digital asset services is growing rapidly, with over 500 institutions now offering some form of digital asset service.
The growth of the digital asset industry is driven by several factors, including the increasing adoption of blockchain technology, the growing popularity of decentralized finance, and the increasing demand for digital assets from institutional investors. In this article, we explore the latest developments in the industry and highlight the potential benefits for financial institutions to embrace digital assets as part of their portfolios.
Governments around the world are recognizing the importance of regulating the crypto space to protect investors and foster innovation. As of 2023, regulatory frameworks surrounding digital assets have continued to evolve, providing greater clarity and stability for financial institutions. Recent data shows that several countries have implemented or proposed comprehensive regulatory frameworks explicitly tailored to digital assets, enhancing investor confidence and mitigating risks associated with this nascent industry. Here are some of the regulatory advancements in the digital assets space from PWC
- The United States: The U.S. Securities and Exchange Commission (SEC) has been actively pursuing enforcement actions against crypto companies, but it has also taken some steps to provide clarity on the regulatory landscape. For example, the SEC has issued guidance on how it will treat token offerings, and it has also created a new office dedicated to crypto.
- The European Union: The European Union is in the process of developing a comprehensive regulatory framework for crypto assets. The framework, which is known as the Markets in Crypto-Assets (MiCA) Regulation, is expected to be finalized in 2023.
- China: China has been one of the most restrictive countries when it comes to crypto regulation. However, there have been some signs of a softening stance in recent months. For example, the Chinese government has allowed some crypto mining to resume, and it has also approved the launch of a pilot program for a digital yuan.
- Japan: Japan has been one of the most crypto-friendly countries in the world. The Japanese government has a clear regulatory framework for crypto assets, and it has also been supportive of the development of the crypto industry.
- Switzerland adopted the Decentralized Ledger Technology Act in 2021, which provides a legal basis for securities to be based on blockchains.
- The United Kingdom: The UK Financial Conduct Authority (FCA) has been actively regulating crypto companies, and it has also issued guidance on how it will treat stablecoins.
- Singapore: Singapore has been a leading hub for crypto innovation, and the government has been supportive of the development of the industry. However, the Singapore government has also taken steps to regulate crypto, and it has issued guidance on how it will treat ICOs.
- Canada: Canada has a relatively permissive regulatory environment for crypto, and the government has been supportive of the development of the industry. However, the Canadian government has also taken steps to regulate crypto, and it has issued guidance on how it will treat ICOs.
- France: France has put in place a regulatory framework specific to digital assets, with the Blockchain Order and the Pacte Law. Changes will occur in the future, with the adoption of MiCA.
- In July 2022, IOSCO’s Fintech Task Force issued a Crypto-Asset Roadmap for 2022-2023. It sets out the plans and activities for two workstreams, Crypto/digital assets, and DeFi. The workstreams will focus on issues relating to market integrity, investor protection, and financial stability, as well as on how to manage crypto and DeFi risks within regulatory frameworks. Both groups will publish their final policy recommendations by the end of 2023.
The regulatory advancements in the digital assets space are aimed at protecting investors and fostering innovation. With the expanding regulatory landscape for digital assets, financial institutions, and ecosystem players need to stay current on the latest crypto regulatory developments affecting banking and capital markets institutions.
According to recent data, the number of successful attacks on major cryptocurrency exchanges and platforms has declined significantly in 2023 due to enhanced security measures financial institutions have made significant progress in strengthening security measures for digital assets. Advancements in blockchain technology, cryptographic protocols, and custodial solutions have led to a significant decrease in high-profile security breaches in the industry. Some of the standard practices that ensure the safety of digital assets include encrypted storage solutions, MPC wallets, and rigorous authentication protocols.
Although there are no specific data on the progress made in digital asset security, they do suggest that the banking and fintech industries have been recognized for their achievements in cyber resilience and security. The SEC’s 2023 Examination Priorities Report also highlights the Division of Examinations’ prioritization of examinations of certain practices, products, and services that it believes present risks to investors and the integrity of the U.S. capital markets. Additionally, the Leaders in Finance Cyber Security Event in 2023 focused on the Cyber Security domain, indicating that cybersecurity remains a top priority for financial institutions.
The infrastructure supporting digital asset trading and custody has matured rapidly, with institutional-grade exchanges and trading platforms emerging, offering robust market infrastructure, liquidity, and sophisticated trading tools. This has attracted traditional financial institutions seeking to enter the digital asset space, with major banks and asset management firms starting to offer custodial services and investment products related to digital assets.
The availability of reliable infrastructure has reduced barriers to entry for financial institutions, enabling them to offer digital asset-related services to their clients more efficiently.
Recent developments in the digital asset space include the introduction of regulated futures, which has been a critical step forward in attracting institutional investment in digital assets. Digital asset derivative products have also been deployed at digital native and traditional financial institutions to risk manage and create new business opportunities. Additionally, there has been a growing need for institutional platforms that have robust governance as well as sound risk and regulatory oversight.
Bitpowr, as a digital asset management platform, provides a secure and reliable infrastructure for financial institutions to manage their digital assets. Bitpowr offers a range of services, including digital asset custody, self custody solution, tokenization, contract solution, settlement, and wallet portfolio management, to help financial institutions enter the digital asset space more efficiently.
The digital asset industry is witnessing significant product innovation, catering to the diverse needs of financial institutions. Recent developments in the industry include:
- Decentralized finance (DeFi): DeFi has opened up new avenues for financial institutions to participate in lending, staking, and yield farming opportunities. Binance has championed DeFi, allowing users to participate in yield farming, lending, and staking activities with ease.
- Stablecoins: Stablecoins pegged to fiat currencies have gained popularity as a more stable alternative for value storage, facilitating transactions, and reducing volatility risks.
- Non-fungible tokens (NFTs): NFTs have emerged as a unique asset class, disrupting industries such as art, gaming, and collectibles.
- Digital asset derivatives have also disrupted the financial services industry, with regulated futures being a critical step forward in attracting institutional investment in digital assets. Digital asset derivative products have been deployed at digital native and traditional financial institutions to risk manage and create new business opportunities
Diversification and Growth Potential
Recent data shows that cryptocurrencies have outperformed traditional asset classes in terms of returns over the past few years. According to Bankrate, the value of all existing cryptocurrencies is around $804 billion, with around $320 billion of that being attributed to Bitcoin as of January 3, 2023.
The global online payments market was $6.75 trillion in 2021, according to Research and Markets.
Participating in the growing crypto ecosystem allows financial institutions to tap into new revenue streams, attract a younger client base, and remain at the forefront of technological innovation.
According to Thomson Reuters, crypto-assets and the vast universe of associated products and services have grown rapidly in recent years and are becoming increasingly interlinked with traditional finance. The UK regulator also found that attitudes have shifted, as cryptocurrencies appear to have become more normalized, with fewer crypto users regarding them as a gamble and more seeing them as an alternative or complement to mainstream investments.
Allocating a portion of their portfolios to digital assets can potentially enhance returns and mitigate risks through improved diversification. Digital asset derivatives have also disrupted the financial services industry, with regulated futures being a critical step forward in attracting institutional investment in digital assets. Digital asset derivative products have been deployed at digital native and traditional financial institutions to risk manage and create new business opportunities.
In 2023, the maturing digital asset industry offers substantial opportunities for financial institutions. Regulatory advancements, enhanced security measures, institutional-grade infrastructure, and innovative products have created a more favorable environment for financial institutions to embrace digital assets. By diversifying their portfolios with digital assets, financial institutions can unlock potential growth and participate meaningfully in the evolving crypto ecosystem.
Bitpowr provides ready-to-deploy blockchain infrastructure to financial institutions, to simplify asset management and custody solutions while increasing customer base and revenue. Reach out to learn more.