Crypto Needs for Institutionalization

Crypto Needs for Institutionalization

by December 10, 2018

Cryptoassets, which comprise the likes of cryptocurrencies, security tokens, and utility coins, are now impossible to ignore. But for them to realize their full potential, institutionalization is needed, according to a new KPMG report titled Institutionalization of Cryptoassets.

Bitcoin Blockchain Pexels

Image: Bitcoin Blockchain, Pexels

The crypto space has strongly grown in 2018 with new entrants hitting the market and established financial services institutions launching crypto products and services.

There are now more than 2,000 cryptoassets, which include newer types of assets, such as stablecoins, for a total market capitalization estimated at US$211 billion. The number of users on crypto exchange platforms is said to be greater than 30 million, and major financial services institutions, such as Fidelity, are launching crypto products and services.

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While 2018 has witnessed significant developments, there’s still a long way to go before mainstream adoption. Institutionalization, or the at-scale participation of banks, broker dealers, exchanges, payment providers, fintechs, and other entities in the global financial services ecosystem, is now the necessary next step that’s required to build trust, facilitate scale, increase accessibility, and drive growth.

Startup including Coinbase, Circle and Ledger have all recognized the need to develop institutional offering.

In June, Luxembourg-based startup Blockchain introduced an institutional platform called Blockchain Principal Strategies that provides institutions, family offices, and individual investors with tailored access to markets, research, and services.

Cryptocurrency exchange Poloniex, owned by Circle, launched trading services for institutional clients earlier this month. The company said it will begin offering institutional accounts, with support for different crypto trading pairs and API interfaces.

Meanwhile, Coinbase is building the infrastructure required for large players to enter the space such as a high-frequency, low latency matching engine, transparent and efficient price discovery tools and a qualified custodian that allows the safe storage of assets in a compliant manner.

And cryptocurrency hardware wallet manufacturer Ledger said two weeks ago that it was expanding to New York as part of its development of institutional custody offering Ledger Vault.

But many challenges remain as organizations institutionalize crypto, according to the report, which cites establishing product-market fit, complying with regulatory and tax obligations, managing forks, addressing cyber risk, determining asset provenance, and updating financial reporting are all top-of-mind concerns for crypto businesses.

“Lessons learned from traditional business models are still applicable, but organizations will need to channel these through a crypto lens,” the report reads.

“Organizations should look to proactively get in front of these challenges and prepare for a changed future. There is a need for a comprehensive framework and crypto-specific capabilities to support this transformation and prepare for a changed future.”

Tapping into the rapidly evolving crypto space, KPMG itself has launched its own cryptoasset practice. The firm has developed a cross-functional framework to helps crypto businesses scale while addressing the key challenges. The framework comprises key capabilities covering strategy, technology, operations, cybersecurity, risk management, finance and compliance, to help crypto businesses on the road to institutionalization.


Year of tokenization

2018 has been undeniably the year of tokenization. While much has been said about cryptocurrencies like Bitcoin in the past, these are just one type of cryptoassets and many others have emerged including stablecoins, security tokens, and utility tokens.

Together, these assets, coins and tokens have led to the emergence of the tokenized economy, arguably one of the more promising use cases of crypto. Global financial services institutions are looking to actively retool and participate in this blockchain-based tokenized economy.

“Cryptoassets may change the financial services landscape significantly with the emergence of the tokenized economy,” the report says.

“While it is still early stages and it is hard to predict how the next 10 years will play out, the tokenized economy will likely be one of the more impactful innovations enabled by crypto.”

In particular, it notes the potential of tokenizing traditional and emerging assets. These digital tokenized representations of assets, which are issued, traded and managed on a blockchain platform, can reduce friction and overhead costs associated with the issuance, transfer, and management of traditional assets such as securities, commodities, and real estate assets. Tokenization could also help increase liquidity, codify rules and regulations, and increase transparency throughout the asset lifecycle, the report says.


Featured image: Cryptocurrency Blockchain, Max Pixel.