It is time for more institutions to adopt blockchain and crypto

As the digital asset space transforms from a niche market to an alternative investment class with participation from a wide range of players, headlines such as FTX, Three Arrows Capital, Voyager Digital and now BlockFi have influenced public perception of the industry, highlighting the need for safe and regulated solutions.

In 2021, institutional interest in crypto increased. Institutional clients – primarily hedge funds, registered investment advisers and some corporations – traded USD 1.14 trillion worth of cryptocurrencies on Coinbase alone, up from USD 120 billion the previous year. This year, the industry has come down from these lofty heights, and as the industry deals with the reality of what has happened, it is more important than ever to define an appropriate regulatory framework for digital assets. It is also incumbent on institutions to work with partners that adhere to the highest level of best practices, such as robust compliance standards, high levels of good governance and management expertise that includes a strong risk management culture.

Looking across the Asia Pacific (APAC) region, we have a mixed bag of institutional interest. Vietnam is the front-runner on the list of countries in Southeast Asia that are the fastest adopting crypto, but the government does not yet recognize cryptocurrencies as legal tender. Thus, financial institutions are completely barred from handling them there.

At the other end of the spectrum, we see jurisdictions such as Hong Kong and Singapore making strenuous efforts to create regulatory frameworks designed to ensure that crypto can safely take its place in the financial sector. Countries like Japan have a legal framework for stablecoins, while other countries like Australia and India are clarifying tax issues related to crypto investments – an important step to ensure the legitimacy of crypto in the financial system.

Research by Accenture reveals that over half of wealthy individuals in Asia have crypto in their portfolios, but two-thirds of asset management firms in Asia have no plans to offer any digital asset proposition – and those that do mostly only target depot. of digital assets.

It is our collective hope that regulatory changes in Hong Kong and Singapore act as a spur to institutional interest in crypto across APAC. But it is also important to look at what have been some of the barriers to adoption to date.

Crypto’s image and security issues

Lack of regulatory clarity as well as concerns about asset security are the main reasons, but things are starting to change.

Regulatory clarity is essential in the development of any financial market, and this is especially true with crypto. With a strict licensing process for Virtual Asset Providers (VASP), countries like Singapore can be considered a leader in crypto regulation. Business dealings involving crypto generally fall under the Payment Services Act, a law that serves to provide consumer protection and regulate payment systems in Singapore.

Singapore has also passed the Financial Services and Markets Bill, which will define the regulatory requirements for crypto and other financial services. In addition, Hong Kong is looking towards potentially allowing retail investors to invest in crypto, provided robust guardrails are in place.

The combination of new regulatory clarity and an open constructive dialogue between various stakeholders in jurisdictions such as Hong Kong and Singapore will hopefully give institutions more confidence in this asset class. More importantly, indications of how digital assets will be treated in Hong Kong and Singapore – both of which are undergoing consultation processes with results expected at the end of this year – will hopefully encourage other Asian countries to follow suit.

In terms of security concerns, our view is that these can be mitigated when institutions work with regulated digital asset platforms that use proprietary technology to securely store digital assets, and use a custodial exchange network framework that ensures client funds are never commingled. As institutions partner with secure, compliant crypto custodians, confidence in the sector will grow.

The potential of blockchain technology

Aside from crypto as an investment vehicle, we actively encourage institutions to open their eyes to the enormous potential of blockchain technology – the technology that powers crypto – as a conduit to the next wave of innovation in finance. Blockchain can help solve long-standing problems in the financial system, such as counterfeiting, double spending and delivery failures. It can also optimize and bring cost efficiency to functions such as borrowing and lending, collateral and settlement.

Beyond cryptocurrencies, blockchain technology will bring about nothing less than a transformation in the way we interact with money, but it will require a large, collective effort from the financial sector to build the rails of the future for the financial industry.

The challenge is that legacy financial institutions are not technology companies. Although there has been a lot of innovation in recent decades, behind the scenes bank transfers and other back-office functions still work much as they have in the past. It’s largely designed to maintain operational stability and security—but that explains why these institutions move slowly and cautiously when it comes to building new technology.

To realize the potential of blockchain while maintaining market stability, financial institutions must partner with technology companies that have expertise in the fast-moving digital asset space and the regulatory structure that institutions need for their own compliance.

A vision for the future

Having a secure, compliant method that will allow asset managers to incorporate crypto as an investment product and blockchain technology as today’s highest performing assets into their portfolios is an important step. As much as it is important that the industry learns from the lessons of 2022, institutions should also not be distracted from the possibilities of what blockchain technology and crypto can be a catalyst for. Therefore, there is an urgent need for all stakeholders to collaborate on a vision of what a shared economic future looks like, while proactively implementing appropriate safeguards so that what took place in 2022 can never happen again.

Finally, it is not only institutions that enjoy the benefits of blockchain technology and invest in crypto and digital assets. Blockchain innovations can help empower people in their daily lives as well.

When we reflect on the past 20 years, it’s hard to imagine the impact the internet and smartphones have had on everyday life. Now almost everyone would be lost without these essential tools. Similarly, blockchain technology and cryptocurrency have the potential to transform the financial system with greater transparency and accountability, not to mention operational efficiencies that will result in cost savings that can be passed on to end consumers. We believe that blockchain technology will also be the catalyst for a more inclusive financial system, removing the barriers for today’s unbanked to participate in and benefit from financial services.

Consumers in Asia are clearly receptive to crypto adoption, as evidenced by the Asian market accounting for 43% of global cryptocurrency activity, with $296 billion in transactions from June 2020 to June 2021.

As the industry may well gain clearer regulatory paths and the technology exists for institutions to protect their digital assets, it is only a matter of time before a rapidly growing segment of institutional players in Asia will become full participants in the blockchain economy.

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This opinion piece is intended for informational purposes only. It should not be construed as and does not constitute an offer to sell or a solicitation of an offer to buy securities of Anchor Labs, Inc., or any of its subsidiaries, and should not be relied upon for making investment decisions. Furthermore, nothing in this article is intended to provide tax, legal or investment advice, and its contents should not be construed as a recommendation to buy, sell or hold any securities or digital assets or to engage in any transactions therein.