Crypto-Wall Street Convergence

Traditional finance emerges from its crypto trough of disillusionment

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There have been few true constants in the evolution of cryptocurrencies over the last five years, but speculation around the arrival of institutions and institutional investors has been one of the most consistently heralded themes.

For years, “Wall Street is coming” to crypto has been prematurely declared, much to the dismay of less excitable researchers, journalists, and industry observers.

But as bitcoin continues marching further into its second decade of existence, and as we see more evidence of convergence between the crypto ecosystem and traditional finance, institutions have steadily moved from simply talking about crypto to taking action.

Recent research by Bitwise Asset Management found that the number of U.S. financial advisors allocating to crypto is expected to double in 2020 to 13%. While that might not sound like a lot, the advisors surveyed help manage roughly half the wealth in the United States.

Further, 65% of these advisors expect the price of bitcoin to appreciate over the next five years (up from 55% last year). This is notable given the United States is the dominant home to institutional capital and trends in the US often serve as an early indicator of how global capital is deployed.

Other recent data support the view that institutional interest and ownership is growing. For example, in May of last year Fidelity stated that 47% of institutional investors believe digital assets have a place in their portfolio, and 22% already own digital assets. Recently, a State Street survey showed that approximately 38% of their institutional clients plan to increase their exposure in 2020 to digital assets.

As institutions begin to offer insight into their cryptocurrency strategies, and market dynamics outside of their control are defined, the catalysts for their interest in crypto are crystalizing.

Past, meet Future

Over the last few years, institutions and global brands have slowly migrated toward becoming less secretive with their cryptocurrency plans.

Take for instance J.P. Morgan creating its own digital coin for payments between institutional clients, Fidelity launching a digital assets division, and the Libra project that counts dominant firms like Facebook and Uber among its founding members.

Not only have these initiatives offered insight into what these firms consider most strategically important to their success in the world of decentralized finance, but also have implicitly validated that the technology underpinning cryptocurrencies is vital enough to future success to warrant strategic investment.

At the same time, there’s never been more speculation around cryptocurrency unicorns using the public equity markets of traditional finance to IPO and fuel the next chapters in their growth. Such IPOs may take place ahead of another oft heralded future catalyst — an SEC approved Bitcoin ETF — and would give Wall Street and institutional capital even more reasons to support (and ways to invest in) expanding cryptoasset ownership.

As traditional finance and the cryptoasset ecosystem inch ever closer to what we believe is an inevitable convergence, the distrust and skepticism that has previously existed around any institutional discussion of cryptoassets is increasingly being replaced with not just comfort, but genuine enthusiasm.

A diminishing need for regulatory crystal ball gazing

Ask any institution what’s held them back from investing in the cryptocurrency sector, and one of the top reasons will undoubtedly be the lack of clarity from regulators. In defense of regulators, the questions posed by cryptocurrencies are dramatically different from other innovative technologies. It was never realistic to expect immediate, perfect clarity from authorities on such a disruptive technology.

Indeed, given the complexity of blockchain technology, and the concerns around the inherent challenge posed by this technology to how financial markets currently operate, the space created for crypto innovation to flourish mark regulators as one of the leading unsung heroes in the story of cryptocurrency’s rise over the last decade.

Today, after years of exploring and educating themselves on the crypto ecosystem, regulators are providing more decisive and comprehensive frameworks to oversee and guide both crypto companies and traditional financial institutions.

We are also now seeing refinement and further clarification around longer-standing regulatory frameworks, such as the New York BitLicense, which can open the door for institutions in the world’s leading financial hub to invest in crypto for the first time. Both the cost and time needed to obtain the license have steadily decreased, and now over 20 firms have been granted a virtual currency charter or license in New York.

By revisiting their early approach to regulating cryptocurrencies and digital assets, New York has also set a helpful example for other regulators across the world in countries like India and South Korea, which have been relatively more restrictive in their early efforts to regulate crypto.

Now, there is still plenty to resolve around regulation of the cryptoasset industry. And continued rapid evolution of blockchain technology makes the job of the regulator all the more difficult. But regulators are motivated to act and more equipped than ever with better data, tools, and research to make prudent decisions that promote rule clarity and responsible innovation.

As these regulations continue to go from ideation to codification, expect institutions to embrace the greater certainty and expand both their cryptocurrency investments and projects.

Capturing a share of history’s greatest generational wealth transfer

Cryptocurrencies have already become a key strategic component of many institution’s strategies to prepare for and claim market share in what will be the largest generational wealth transfer in history. Research and consulting firm Cerulli Associates estimates that as much as $68 trillion will transfer from Baby Boomers to younger generations over the next 25 years.

This work has taken many forms, most often focusing on creating “digital banks” with friendlier brands and mobile-first experiences, which keeps the next generation of investors easily connected (“banking everywhere”) as they discover their own relationships with institutions they learned to distrust following the 2008 Global Financial Crisis. A parallel development is that young people have more willingly embraced cryptocurrencies as investable assets than their predecessors — especially among the Millennial demographic.

Just last autumn, CoinShares, Blockchain.com, and MKS (Switzerland) launched DGLD, a token that represents allocated physical gold stored in Swiss vaults. Purchasers of DGLD benefit from the digital ease of use, security and transparency of cryptocurrencies, combined with the enduring value of physical gold. Tokenized gold use has grown significantly and we can expect to see many more traditional assets tokenized.

A 2018 survey by YouGov found that over 50% of American Millennials were interested in crypto, and were three times more likely than Generation X to invest in crypto according to a survey by Bankrate. There’s less data available on Generation Z, which will follow Millennials as the next wave of investors to join the market, but early signs indicate a similar affinity for digital assets.

Only time will tell if existing institutions are able to weave cryptocurrencies into their offerings in a way that will appeal to these younger generations, which will soon hold the purse strings for the vast majority of wealth, or whether new challengers will continue to dominate crypto.

Regardless of whether it is an incumbent or startup that ultimately wins, it’s clear that crypto will play a central role in the evolution of wealth management.

Looking Ahead

It’s impossible to predict with perfect certainty what will happen in the next decade of cryptocurrencies as the crypto ecosystem and technology are still rapidly evolving.

But something crucial happened in the last two years: It is now widely accepted that cryptocurrencies are not going away.

As institutions learn more about the growing appetite amongst their clients for crypto, receive necessary regulatory clarity, and increasingly cater to a younger generation that has bought into the promise of cryptocurrencies, the choice has become very simple: Either embrace crypto or become irrelevant.

Garrick Hileman is the head of research at Blockchain.com, the leading provider of cryptocurrency solutions and creator of the world’s most popular crypto Wallet and the Blockchain.com Exchange. You can read more of his analysis and research on Twitter @GarrickHileman and @Blockchain.