For many years, the idea that traditional financial institutions would invest in digital assets seemed like it would never happen. Before 2017, the crypto market capitalization was less than $20B. But by the middle of 2020, crypto market capitalization peaked at more than 2.8T, due in part to a significant institutional presence.
Clearly, institutional investment is now a part of the crypto story. But still, many challenges remain for firms looking to take advantage of growing digital asset opportunities.
To explore these challenges, their potential solutions, and the overall digital asset environment, SS&C Eze recently hosted a conversation between experts in the space:
- Frank Matarese, Senior Director of Product Management, SS&C Eze
- Cash Lafferty, Head of Financial Institutions Group, FalconX
- Eric Rose, Managing Director and Head, Cowen Digital, Cowen
If you are considering moving into or growing your presence in digital assets – whether crypto, NFTs or otherwise – read on to learn about the state of the market today, potential obstacles institutional investors must watch out for, and how you can best capitalize on this exciting market.
What follows is an overview of their discussion; to view the full conversation, click here.
Preparing for the Expansion of Tokenized Assets
In the past year, there has been increased demand from institutions wanting to onboard digital assets into their existing strategies or to launch entirely new ones. The question is: why digital assets and why now?
According to the experts gathered on the EzeCast, awareness of an impending increase in the tokenization of society is a key trend driving interest in digital market opportunities today.
The panel believes that more and more assets will be tokenized in the future, opening a broader scope of investments. Real estate, infrastructure, and the multiple trillions of dollars locked in illiquid forms are expected to become tokenized over time.
The investments firms make today are just the beginning of a growing, diversified digital asset portfolio.
Challenges to Institutional Adoption of Digital Assets
Volatility has been part of the crypto story for most of its history. One factor contributing to that volatility is the number of exchanges on which crypto is traded. Currently, there are over 300 exchanges – far too many to be a workable solution.
In the future, our panel of experts believes that this volatility will slow down. The number of exchanges will likely merge into a much more manageable number, and more and more institutions and players entering the digital market will dampen volatility even further.
Infrastructure is another barrier to digital asset growth in the institutional space. Because crypto started on retail platforms, much of the infrastructure needed to support operations at an institutional scale is still in its nascent state, and only a few vendors can adequately serve this type of asset today. As a result, most funds do not have the pipes, custodians, fund administrators, etc., to engage fully in the digital asset space – it's unlike anything that's been traded before.
However, some technology partners are ahead of the curve and already have the experience and infrastructure to meet the opportunities and challenges digital assets present. Finding such a partner will take some research, but the effort you put forward now will pay off in the long run.
Finally, regulation is the guidepost many larger asset managers are looking for before investing in digital assets. Their questions start with which agency controls digital assets – the SEC or the CFTC – and extend into questions about strategies and systems.
The panel notes that while there will likely be even more growth in this market as regulations emerge, today, there are already plenty of vehicles that can facilitate access to these markets. Harnessing the early upside requires finding them.
Navigating Today’s Digital Asset Market with the Right Partner
Before allocators invest with you, they will expect you to have the infrastructure and administration a digital portfolio requires. Creating success in the world of digital assets requires you to partner with providers that have the tools and expertise you need to access and support the full range of digital opportunities.
The panel recommends you find partners that can offer institutional digital asset infrastructure and a single point of access to aggregated sources of liquidity seamlessly within your existing systems, including the workflows of your OEMS.
Because the digital asset market is always on, you also need to be sure your providers can help support this around-the-clock nature with capabilities like delayed settlement.
When dealing with regulations, the panel suggests funds work with a firm that offers a structured product and follows CFTC and any other relevant guidelines as they become available. While regulations will change over time, working with a partner that follows the current procedures ensures your firm is prepared when regulations change in the future.
Finally, panelists emphasized the importance of doing careful due diligence on your chosen partner. Are they well-funded and experienced? Will they be around in the future? Do they have specific expertise in working with the complexities of digital assets?
Choosing the right partner today ensures you have the framework to succeed as the digital asset opportunity evolves.
The Time is Now for Digital Assets – Is Your Firm Ready?
Once considered an outside fringe investment, some of the largest financial institutions are now embracing digital assets. Despite challenges related to volatility and infrastructure, these institutions believe that the world's tokenization will only increase demand for digital assets.
No matter where your firm is on its commitment to digital assets, it is essential to understand the market and the solutions you’ll need to navigate it so you can be prepared for what lies ahead.