Global Institutional Adoption of Digital Assets | KBW2023

[Music] hello everyone welcome to the global adoption of institutional assets my name is Sylvia I'm the research lead at bullish exchange joining me today we have uh John re from Vega digital prime and we've got Regan papy from Circle as well as Manuel Nest from Fidelity digital assets uh a warm welcome to all panels today so crypto's had quite a rough year and the US SEC Crackdown on the industry as well as what's coming out um with altcoin regulation deeming it as a a security um CVI which is the crypto volatility index is at all-time lows 35 to 40 when I last checked I think has this stifled institutional adoption in the industry or what are your thoughts about this landscape uh maybe Danel yeah I can oh I can start um I I think there's kind of two two answers really to to that question right I think there's the sort of long-term uh adoption Trends and um you know we we we actually have data around um that kind of thing because obviously we've spent a lot of time and effort and capital in this business and so we we want to constantly be testing our assumptions so we have this study that we release every year since 2018 uh where we survey over a thousand investors institutional investors across the world um you know all the way from high netw worth professional investors all the way to corporates and pensions and that kind of thing um and so the data that we get from that survey even in 2022 which was very clearly you know a a bare Market uh type of year uh was very encouraging so like it Europe and Asia in particular um the current rate of adoption amongst those investors was around like the high 60 so I think 67 68% um which is very encouraging obviously the size of the allocations might be small but it means that people have done their research they've decided to make an allocation however small that is um but more interesting even is we ask people do you have an intention to allocate to digital Assets in the future uh and then that number goes up to 80% um on on a global level and so we we're pretty encouraged by that the second part of the answer though is um you know in places like the US where there was perhaps a more the the shock of FTX is perhaps more deeply felt um there's clearly been a little bit of U you know I think a Slowdown um in in um in some of those adoption numbers um and so I think there's again kind of two stories one is more shortterm and we think we have a lot of signs to believe that institutions are still kind of getting ready for when the spare Market subsides and then there's another story that is very very bullish in the kind of you know three fiveyear term that sounds encouraging um so the the key note to wrap up from there is institutions are coming right um regon do you have any insights I mean I I feel like it's pretty natural during any uh bare Market that you see less interest from the public but as anyone knows uh not just in crypto but in any markets as soon as uh that flips then everyone comes rushing back in um the reality is that most people have entered the crypto space Have Some entry in it whether it's an account with an exchange whether it's a crypto wallet or so forth um and may be not active but are ready to be active I've also generally seen in speaking to uh Banks and others that um that people are preparing to adopt crypto and I think really the the major item there is that um perhaps in one part of the world there has been regulatory challenges but in another part of the world especially here in Asia we're seeing very positive development Singapore continues to develop its framework really well Hong Kong has started retail trading for limited assets uh since uh June um Japan is making very very good progress including with their stable Corin legislation so we're seeing uh lots of very very positive moves also in Europe and other places um which is allowing the more traditional institutional money to come in um and um and I don't necessarily think that the regulatory envir um in the US will stay negative forever in fact I think we're seeing signs that it's turning around as well so um I don't necessarily share the view that institutional are are going against crypto I think um I think if anything it's just happening in the right way and the events of of the of the peak of the previous bull market is setting up the stage for the next bull market to be done in the right way with the right actors let's say thank you thank thanks for that and John do you have any insight as well yeah I think big picture-wise the institutional adoption of crypto is is ongoing as we speak right I mean it all happened or started uh in 2020 when you know public companies asset management companies and even endowments and Pension funds uh start getting into it now um last year uh because of the scandals and all the the the mishaps uh took a little bit of a you know a slow slow down but uh uh what you know what we're estimating U is that going forward is going to be quite a a meaningful uh uh part of the the overall crypto Market um it's estimated that as of 2022 there was $127 billion doll worth of institutional uh trading activity and uh in the space amen which is uh crypto Prime brokerage uh that number was very very small it's only uh $2 billion and that's estimated to grow to about 10 10 billion by 2024 uh uh year end so uh if you look at just uh coinbase as a as a rough measure you know um 2021 I think they're institutional business only 21% of their overall Revenue but uh it's gotten to uh close to 40% so uh it's a very meaningful business yeah I agree thank you for that John the next question I think uh m well um how do you think the next generation of investors like your gen Z and your Millennials are going to impact institutional strategies going forward yeah so so I think I think that's that's really like you know from a secular Trend standpoint um that's really the driving story right like that's that's really the story behind crypto behind web 3 and the metaverse um you know I I always like do this metor of like you know I probably bought CDs a little bit too long right and until I realized that music has value regardless of the medium that it's distributed it on and and I think that that's kind of the realization that younger Generations don't have to come to because they've they're brought up in a digital world and I think you know Co really accelerated that because it moved particularly the sort of uh the younger Generations has moved a lot of more of their life uh into digital terms and so you need the sort of financial rails that are going to power that economy U which is which is up and coming and that's you know you can't really fight demographics right it's it's it's a silly idea um and so I think that's really sort of an undercurrent that that underpins this industry that it's very hard to stop which is why again you know I go back to my previous comment of I I think maybe this is a brief slowdown but if you look 10 years ahead I think it's more or less inevitable um that institutions are going to have to cater for this younger generation therefore have to they're going to have to have strategies um around crypto and web 3 yeah definitely I think adopting to the different differing landscape and changes in which Millennials and gen Z view like institutional or financial products as well is going to be huge and um missing out on that market for institutions is like a no-o basically um and Regan in circles kind of product Innovation usdc is uh a prime uh stable coin that we've seen um proliferate around headlines is there any other kind of digital innovations that circle is coming up with that you can maybe give us some insight to sure um when we look at Circle we think of ourselves as an infrastructure company first um in many ways so usdc is really uh a medium of payment that's Global that is based infrastructure for anyone in crypto or increasingly web 2 companies to be able to move money around the world um but also we're supporting this effort with our web three services which essentially you can imagine how AWS created cloud and democratized the ability for people to build applications very easily we want to do the same thing for web 3 so people can build um applications really really simply without all the complexity of web 3 today um our first product is programmable wallets so traditional web2 digital companies can embed a wallet within their um within their application essentially web three enable it um but I I would just sort of uh add to the where you said about the Young Generation if you think about like the generation today um someone who's on Tik Tok which is uh which I'm unfortunately not on too much but um they don't have um you can say like half their friend base is who they go to school with and half their friend base is all over the world natively right and so the concept of having like lots of countries and lots of currencies doesn't necessarily make sense to them they need a form of being able to trans act value and um usdc is definitely that's really what we're trying to do come up with a common currency for the world but also just crypto and web 3 in general you know I think overall there's going to be a drive towards having things that have commonality globally right um and people will talk Less in their home currencies and More in digital currencies and that will drive uh demand as you mentioned around institutions having to keep up with those people who are 15 now but will have serious money in 10 or 15 years time you know that's what I think will mean that our industry will just keep growing and growing I don't really look at like the like it's two-year bull marker for two-year bare market for Bitcoin apparently the longest ever but I don't really look at it that way I I think um you know when you look at over 10e time frame when you're looking back in 2030 um it's going to kind of not seem meaningful yeah so go on on the Baby Boomers and start catering to Tik Tok FS um and Jonathan um I think Korea is actually quite an opaque market so anytime a foreign institutional firm is trying to break through here we've seen in previous cases that they've failed to or like um in exchangers case there's been a lot of push back and knock back um I think from your perspective what's the current market structure like in Korea and can you talk to how you see that changing sure um Korea is a really unique Market I mean there's a lot of liquidity here um and rightly so because you know it's the most Internet connected with fast fast bandwidth um and you know people's familiarity with digital assets is no surprise excuse me um now the market structure here is it's dominated basically by uh the local players uh primarily around uh crypto exchanges so you got uh upbeat bam coin1 goex and Corbett and uh I think recently they're going to add U haniko uh to the list and these players enjoy the privilege of uh or or they have the mandate to offer um Korean one trading pair and uh that's where the liquidity is uh in this business here so uh if you look at the uh the way U foreign firms have tried to enter the Korean market uh without having that local connection um and the relationship with the regulators and whatnot uh it's a tough battle for them right so I think they've resorted to uh m&a uh not not because of choice but uh that was the only way for them to have access to to that liquidity okay thank you for that and I think um it's not a surprise that with such a large retail participant in the Korean market that institutions would want to follow as well and try and break through to this really appealing Market um I think a question for all of you uh in your opinion what are the barriers that are in place to to kind of prevent the adoption of institutional uh Assets in and allocation to ual assets so is there any any particular kind of barriers that you see that institutions are facing currently U menal we'll start with you yeah I I um I start we again I'll I'll um I'll go back to um to data because we you know we we also ask our our investors our in our survey about that um and and it's it's interesting so well number one which I mean we could spend a whole panel on it so I won't spend too much time is volatility right and I you know I could give you a bunch of reasons why I think actually over the long term that that stops being so much of an issue um but then the other there's a long list um of questions that that investors kind of quote um they're really bucketed into three groups and and all of them I think are things that frankly like the institutions on this panel are already starting to solve so one is security things like Market manipulation things like private Key Management you know the sort of like nuts and bolts of of operating in this market which feels very different from traditional markets uh and it's still much more primitive right so so it's a valid concern but it's something that you know we're certainly trying to help with that Fidelity stets um and and there's others institutions trying to take some of that complexity away um number two is unsurprisingly kind of regulatory certainty concerns um again as regalan was alluding to I think that's relatively transitory right um You can see MAA in Europe um that's uh the final Tex already in place and and is coming into place sort of at the end of 24 um you can see it all across Asia these sort of regulatory regimes popping up and so hopefully that's another category that goes away um and and then finally it's it's the complexity of the asset that goes back to the demographics piece right which is clients complain that you know it's very complex and new uh they don't know how to price it uh there's no fun fundamentals and we all know that that's that's not right there are fundamentals and there are pricing models they're just different pricing models you can't simply just apply a discounted cash flow although you can do that with ether now so like so it's things that I think go away eventually um and so I'm I'm hoping to see the numbers so we have percentage kind of concern numbers over over those things um and we now have done this for enough years that we can kind of start observing trend lines and I'm hoping that we see some of that starting sort of tail off um ask me again in a couple years some kind of like correlation metrics with that and definitely cannot apply a DCF model to crypto toomics no and regam do you I I think the biggest thing um I mean you can talk about regulation and security and all those things will will will sort themselves out but I think the simplest thing is just a lack of fomo um you know the whole crypto market cap is like one trillion dollar right now there is six us companies that are listed that are worth more than $1 trillion um so you've got six companies that are worth individually more than the whole of crypto uh but it takes time like we started in 2009 the market Cap's grown it peaked around two now if it continues then in in 10 years time we're looking at a market cap you know closer to 10 trillion then it's just like significance right like it becomes significant enough that it requires allocation in a portfolio versus now you can sort of ignore it also by the way like as the market cap of crypto increases the volatility generally over the years is increased like the swings may still be big but overall they're they're decreasing right and so that's I think it's simply that like it's just not significant there's about $800 trillion in assets globally 350 trillion just in in equities bonds currencies and crypto's one so it's just it's not even 3% of the liquid assets right so once it becomes significant it gets allocated I think as simple as that yeah right now I think like it's still such a nent stage and the industry at $1 trillion isn't going to really Peak allocator interest but I think definitely once it starts growing and there is that sense of fomo that you get when your portfolio a 1% Bitcoin allocation and then a 60/40 traditional Equity Port Equity to fixed income portfolio and you see how much that actually changes the return on a a risk adjusted returns basis you'll start to turn heads and you'll start to actually think okay maybe this warrants uh a bit more attention and John do you have have any yeah I think I think Manuel like outlined it quite well but just just to add to uh his points I think uh a lot of the institutions uh are they are managing other people's money and they have a fiduciary duty to do their job and um I think there is uh not a clear uniform accounting guideline or standards uh uh for for the digital assets space and I know it's being worked on right now at GL level uh with fby and uh just here locally in Korea uh they're going to come out with a clear uh Accounting Standards uh in early 2024 uh so I think that could be uh one of the barriers uh that might hinder uh institutional participation okay thank you for that and um I think this one for Manuel there's strong growth coming out of the UK and international business for Fidelity can you talk to how that sustained and what the foreseeable future looks like yeah yeah it's it's been it's been um a huge growth area for us I think in general um you know in general fidy toet has been sort of a pretty fast growing business anyway um the the reason International as being to particular growth areas is kind of twofold so one is you know our kind of Home Market International Home Market is is Europe um and and MAA really has provided like that regulatory coverage um since the the text kind of got adopted and passed by parliament um that a lot of the European institutions needed in order to satisfy their client demand and so you're kind of starting to see there there's a lot that doesn't necessarily transpire publicly but behind closed doors there's a lot of large financial institutions really putting together meaningful um you know meaningful plans uh for for crypto servicing whether depending on what their main businesses are right it could be retail offering but it could also be Market making or custody or or whatever it might be um and so that's driving a lot of our growth because we have to be able you know those financial institutions are very different to service than sort of a you know than a hedge fund right so and it requires slight different teams uh it requires SL different product and investment so that's that's been one of the areas uh for growth um the other piece is is was really driven from uh you know some of the debacles in in in 2022 um you know we've we've had a we have this model in Market um and this idea that you know disaggregation of trading and C was a good idea it's just that until 2022 not a lot of people cared about that idea and so um it's been it's it's been you know obviously not great to see but I think you know somebody was making the point earlier that I think after 2022 we're actually going to be better place to do this right and one of those things was people looking for third party custodians that allow them to kind of keep you know their Assets in the safety of of sort of a qualified custodian and and still being able to deploy that capital on venue or for you know margin loans or whatever it might be so that's the the other key driving factor for us is the fact that we could finally kind of use this product we've been we've been trying to use for a couple years and and and really seen huge amounts of demand um coming our way yeah it seems like there's some real moat there for fedility yeah yeah and um dollar dominance has actually been really strong and dollar milkshake Theory as you know countries like Argentina Venezuela turkey you're seeing huge dollar demand um um in terms of circling usdc which country you seeing the the biggest adoption in the process of um inflation of the last few years has really trashed some currencies um and some have just devalued to the point of almost being like pointless um their Capital controls are are crazy I was in Argentina and um you know they've got this blue rate and their official rate and they're so far apart like 100% apart you know and so um people need stable currencies so they can um trade so they can live so they can be secure in their assets um but the biggest problem that we see is that it's not trivial to open a US dollar bank account like for the majority of the world like I can open one because I'm in Singapore and you're in Hong Kong um but if you live in an Emerging Market whether that's in Latin America whether that's in Africa whether it's here in Asia each one of these markets have at least 3 to five major economies I'm not talking about small countries with sub 100 billion GDP I'm talking like significant economies that don't have a stable currency have currency that's devaluing more than 100% a year and they can't go and open a US dollar bank account and so for them the ability to acquire um usdc or digital dollars and just have a wallet and know that it's safe and secure it's just transformational it's huge for them right and um you know currently there's tens of trillions of dollars uh in the world and I think what we're enabling is this process of moving those dollars online to the blockchain so it can be moved between people almost instantaneously so to answer your question I think there's you know there's lots of markets whether it's um turkey or whether it's um you know in this region whether it's Pakistan or Sri Lanka or Myanmar um but you know there's also just general demand to send dollars for TR trading so the first one is like secure your dollars but the second one is just movement of dollars for trading you know I'm a Trader who imports from China and I need to move money back but it's really hard through a bank it's much easier via the blockchain so um the the global amount of digital dollars right now is just North of hundred billion doll but the demand for this is well into the trillions it's almost Limitless it's just the major thing that we have to overcome is the Simplicity of getting um uh wallets into people's hands the user experience but the actual demand for dollars compared to where we are is almost Limitless yeah I definitely think like accessibility plays a huge part because you know these developing countries are underbanked or unbanked and being able to provide dollar access to them is such a pivotal point I remember back when I was in Montenegro and vitalik was speaking he said people recognized him in Argentina more than down in Silicon Valley and that was because ethereum played such a a huge part as well for um for these citizens that had to kind of spend their paycheck to paycheck because hyperinflation is such a big issue down there and we I guess from the developed worlds like we're we're privileged in the sense that we don't have to think about these things but people from developing countries go through a much different Financial landscape and being able to cater to that is really important yeah um and John I think in terms of Hedge funds allocators like fund managers as well as family offices like who do you think will impact your business and impact growth um in the firstable future um I think um two major parties right like first will be you know the hedge funds uh because just because of their trading activity uh and the complexities of their strategies I think uh Prime broker service is much uh very well needed there um so I see that as the major growth driver as the first and uh um so you know there's intricate um you know services that are involved financing uh a leverage um custody and all the um all the other miscellaneous uh Services um so be focused on that the second party would be the asset management companies with de Pockets uh their trading activi is not as frequent or you know yeah frequent as as in hedge funds but they're uh their size um and uh I think they're you know just the just the the type of uh money that they manage uh I think they will be an important factor uh for the next growth yeah I think um defin so hedge funds and asset managers on the top two list there in terms of specific regions or countries that are going to witness significant growth in the next like few years is there any that you're currently really bullish on I mean us we've seen the SEC Crackdown and then a lot of interest has kind of come towards Asia and uh Hong Kong Singapore they kind of competing against each other Japan web 3 as well they're making that a huge Focus um maybe manual if you have any insight as to which country you think yeah I I think that there'll be I think there'll probably be some segmentation right so I think the I think the European market I'm I'm very bullish on well partly because I'm biased and I'm I'm based that right but uh but partly because um because of this new regulation M which you know for those that are not aware is basically a European level regulation which means that you can um access all 27 markets with one license right it's called passporting this concept of passporting which is a very EU thing to do and and hadn't been done for crypto even though it's done it's been done since you know miid one and two for for normal sort of Securities and so um very bullish with what that brings which is access to you know hundreds of millions of of investors potentially um and I think that'll be pretty transformational also because I think you'll act a little bit like gdpr in the Privacy space I think this will act as kind of an anchor regulation for places like the UK for other jurisdictions uh you know eastwards of of Europe as well um that might see that as a kind of model that they can then sort of lift and shift um so so that's really the the main one but then obviously you know in the wealth space the Middle East is is you know far ahead and and there's some there's some pretty interesting regulatory regimes um and as Ragan mentioned sort of Singapore and Hong Kong over here as well okay so mainly um Europe Middle East Singapore and Hong Kong for you and Regan I I actually take a different view I I think that those are the markets in which we're regulated and I I like I think of like institutions coming into crypto as kind of like upside down and and I'll tell you why if institutions are there but there's no real use case and we've got only a couple hundred million users Facebook or met as a company has three billion users you need to drive that Mega Demand right before you can create the market cap which creates the fomo which creates institutional trading right and so the yes the regulated countries you know are creating a way for crypto to have a regulated way to do this but the magical combination to me is a country with a very big population which you see in in Asia Indonesia Vietnam countries like this um a big population love to trade globally either digital Goods or physical Goods exports have a terrible banking system right and you add to that um so it's really hard to move money right and you can add to that maybe a deflating currency or Capital controls you got that mix of those five things and I can tell you crypto flies in those countries yeah right and that's where I think the massive demand is going to be for crypto and stable coins and that is where we're going to onboard users as we make it easier and easier for people and if that does really well then you create a lot more market cap and then institutions have something to trade and for you know traditional buyers to come into and that's the way I I see it playing out all right so AP region and and John quickly which region yeah I think uh the more stringent the regulation uh it's better for institutional participation and the reason why I say that is because uh you have to work within the confines and the framework of the regulation right uh for institutions to actually actively participate and just looking at Korea in the past you know it's had its uh share of being stringent in terms of uh regular ations and uh the approach that they're taking is to be safe than sorry right um so I'm bullish on Korea uh a little bit biased like Manel but but I'm also very um I'm looking at Hong Kong uh in A New Perspective because theyve recently really changed their tone and I think uh with you know Hong Kong being the Global Financial Hub and there's a lot of dry powder there uh once the institutional investors there move into this asset class I think right now you could you know under the sfc uh type 1 and type 9 license you can get in um you know there will be a lot of inflow into this space thank you thank you very much and I think that's uh time so thank you very much for joining the panel everyone thank you thank [Applause] you