Institutions will continue to support blockchain

Despite much of the media presenting 2022 as a failure for crypto in terms of asset prices and major companies going under – VC investments in blockchain in 2022 increased by around six billion USD.

About US$36.1 billion was raised in 2022, compared to US$30.3 billion raised in 2021.

While it’s easy for non-professional or retail investors to look at last year and feel depressed, for an institution invested in blockchain, the events of 2022 are little more than growing pains.

It is almost impossible to find a financial institution that is not involved in blockchain or crypto in some way – whether it is investments in digital assets or the underlying blockchain technology. A survey in Campden Wealth’s Europe Family Office Report 2022 found that one in three European family offices has an investment in blockchain and one in five in the metaverse.

This is because family offices and other institutional investors understand the long-term potential of blockchain technology and tokenization. Many of these applications are well known but perhaps not fully understood by those outside the financial world that it appears to be revolutionizing.

The fact is that most of these institutions have first-hand experience working with the asset classes and/or services that are set to be revolutionized or made more efficient by blockchain technology. They understand the magnitude of the opportunity. I won’t go into too much depth about blockchain applications as they have been talked about in depth for years. But some of the bigger opportunities that investors have their eyes on are:

Tokenization of shares, commodities and bonds: In addition to improved settlement times, tokenization can also ensure faster liquidity and transparency in these markets. Investors know this is coming and are looking for the businesses that are building the right technology.

NFTs: Putting aside the NFT ‘art’ market for a moment, there are several business use cases for NFTs, such as event ticketing, identity and access management, certification, musical content rights and more. In one way or another, we all interact with content or services that can be accelerated and made much more efficient by using NFTs.

DAOs: Although this is likely to be further into the future, decentralized autonomous organizations have the potential to replace many business models where efficiency, fairness and transparency can be encoded. Not having a central authority, but creating a structure where everyone benefits from the long-term success of a project can be groundbreaking.

For those not watching, these are well past the idea stages and are being implemented today. For example, the Swiss private bank, Cité Gestion, started using Taurus technology to tokenize its own shares in January 2023.

Some of the biggest early adopters are in emerging markets – especially Africa. Due to political repression and inflation, many people have turned to digital finance to store and trade value. The latest crypto owner data from Triple A estimates that there are 53 million cryptocurrency owners in Africa – 16.5% of the global total. Where there is a growing need and an increasing number of possible crypto solutions, it is impossible for institutions to ignore.

Institutions are not phased by the short-term volatility of assets or falls in valuations, as they have a much longer horizon of several years. Even after the FTX scandal, many institutions remain steadfast in their belief in blockchain technology. David Rubenstein, co-founder of the Carlyle Group said when speaking to Private Equity News “Despite today’s cryptocurrency-related challenges, things related to blockchain technology are likely to see a fair amount of growth”.

And quite a lot of growth it seems. A report by Future Market Insights suggested that the Web 3.0 Blockchain market will grow to an estimated value of USD 116.51 billion by 2033, with a strong CAGR of 44.9% over 2023-2033. The market is currently valued at $2.86 billion.

The crypto world has been forced into a renewed need for maturity. The right questions about regulation and quality are finally being asked. Institutions through capital allocation and selection of providers will ultimately be the ones who decide which businesses and products make the cut.

Although it has not shaken the faith, I hope that the FTX crash has given institutions a much-needed wake-up call to step up their due diligence processes. In an ideal world, extensive due diligence should have been performed before Sam Bankman-Fried received $1.7 billion in institutional investments.

In the short term, this means a slowdown in investment for blockchain companies while investors recover from the initial shock and work on their due diligence processes. In the medium/long term, this means that tomorrow’s big businesses are more likely to be efficient and reliable. Institutions know this, and they will continue to support blockchain, albeit cautiously – because the alternative is missing out entirely.